We can’t remember the last time an ECB meeting was this hotly anticipated. It’s almost up there with the Fed’s November 3 meeting, when it announced quantitative easing.
At issue: There’s been a major run on the PIIGS that’s even creeping into the strong European interior, and since governments can’t get their act together, everyone is looking at Jean-Claude Trichet to use his power to stop the crisis.
He kind of sort of hinted yesterday that he was open to more action, and arguably that’s what got the party started.
The thing is, virtually nobody thinks Trichet will really heap a major gift onto the market. That’s not his style.
Here’s what Morgan Stanley expects:
Notwithstanding its conviction that the onus to contain the debt crisis is on governments, we believe that the ECB is unlikely to rock to boat, for instance by exiting its unconventional measures prematurely. Note that extending the existing measures already marks a turnaround in terms of the ECB’s monetary policy stance. Until very recently, the ECB’s plan was to continue with the gradual exit from its non-conventional measures in preparation for an eventual hike in the refinancing rate. It is clear, we believe, that this exit strategy will be put on hold in the current environment. In addition to putting the exit strategy on hold, the ECB has several policy options to reverse gears and add liquidity to the markets. These include:
- Prolonging existing refi operations, including the full allotment for the three-month LTROs for at least another quarter.
- Relaunching longer-dated LTROs, notably the six-month refi operations.
- Upsizing the SMP to safeguard the monetary transmission mechanism, possibly to include additional countries or securities.
- Restarting the covered bond buying programme which was closed last July.
- Last but not least, lowering the refinancing rate.
No Fed-style QE at this juncture: All these policy options are at the ECB’s disposal within the existing policy framework and are likely to be considered before the Council contemplates unsterilised asset purchases of a similar magnitude as those of the Fed. As a multinational central bank, the ECB faces additional legal, institutional and financial constraints in conducting large-scale asset purchase programmes. If it does not navigate these constraints carefully, the ECB risks being negatively affected itself by the lack of a fiscal federation that is at the heart of the sovereign debt crisis. In addition, the ECB will be very aware, we think, that its policy actions during the crisis have likely contributed to national governments not addressing the root causes of their problem more aggressively in the time that the ECB bought them by providing unlimited funding to the banks and intervening in peripheral government bond markets.
Hence, as back in May, we believe that the ECB will likely want to see a major step-change from euro area governments before it would consider outright asset purchases. Given that the December diary is brimming with European policy gatherings, starting with the Eurogroup/Ecofin meeting next week and the European Council the week after, it seems unlikely to us that the ECB would already announce major asset purchases at this Thursday’s meeting.
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