The European Central Bank kept interest rates on hold and altered its assessment of risks to the economic outlook as investors focus on the bank’s possible role in helping Greece avoid default.
“The economic outlook remains subject to high uncertainty and downside risks,” ECB President Mario Draghi said at a press conference in Frankfurt today after policy makers left the benchmark interest rate at a record low of 1 percent, as predicted by 55 of 57 economists in a Bloomberg News survey. Last month, he said the outlook was subject to “substantial” downside risks.
Draghi will be questioned on whether the ECB intends to use its Greek bonds to help the embattled nation reduce its debt. While the ECB has remained silent on its plans, options canvassed range from selling its Greek bonds at the discount price it paid for them to taking a loss on the Greek assets held in investment portfolios, two euro-area officials said late last week on condition of anonymity.
“Markets would prefer that the ECB communicated clearly whether its Greek bond holdings will participate in the debt exchange,” said Jens Sondergaard, senior European economist at Nomura International Plc in London. “We expect Draghi to be asked on the ECB’s view, but we do not think he will be willing to provide any details.”
At stake is whether Greece can complete a private sector deal to reduce its debt by as much as 100 billion euros ($133 billion) and secure a second bailout package that will allow it to pay its bills -- key steps toward ending the debt crisis.
The Greek government has reached agreement with political parties on austerity measures required for the 130 billion-euro bailout package and an announcement from Prime Minister Lucas Papademos’s office is expected shortly, a government official said.
Draghi has been instrumental in easing the turmoil in his first 100 days in office, offering banks unlimited three-year loans and reversing the two rate hikes implemented by his predecessor, Jean-Claude Trichet.
Bank of England
The Bank of England today expanded its asset-purchase program by 50 billion pounds ($80 billion) to 325 billion pounds and left its key rate at a record-low 0.5 percent.
Greece remains center stage in Europe more than two years after it triggered the debt crisis with its ballooning debt.
Premier Lucas Papademos is struggling to unite political parties on the austerity measures needed to secure a second bailout from euro-area governments, while a deal to write off 70 percent of the value of bonds held by private investors remains to be finalized. Greece’s private creditors plan to meet in Paris today.
Greek Finance Minister Evangelos Venizelos said this morning there are still “issues outstanding” that must be resolved by the time euro-region finance ministers convene later today. That meeting is scheduled for 6 p.m. in Brussels, Luxembourg Prime Minister Jean-Claude Juncker said late yesterday, without specifying an agenda. Euro-area politicians must sign off on any Greek aid accord reached by negotiators.
The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since May 2010. Between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.
The ECB is considering selling those bonds to the European Financial Stability Facility at the knock-down price it paid for them, forgoing any profit, two euro-area officials said late last week. The EFSF could then pass that saving on to Greece or even take a loss on the bonds, helping to alleviate the nation’s debt load without compromising the ECB’s independence. There are still hurdles to that option, the officials said.
Another course is for euro-area central banks to give up profits or take losses on Greek bonds in their separate investment portfolios, which are not part of monetary policy operations.
So far, Draghi hasn’t signaled any ECB involvement in a Greek restructuring. Instead, the ECB has focused on warding off a looming credit crunch and encouraging lenders to re-enter sovereign debt markets.
On Dec. 21, it allotted a record 489 billion euros in three-year loans to banks, the first of two such operations. In the run-up to the second offering on Feb. 28, the central bank is finalizing a further broadening of the pool of collateral banks can use to obtain the cash.
“The ECB is doing more,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Six months ago we basically had the ECB fighting behind the scenes with the politicians, there was a lot of uncertainty. Now, while Greece is still an issue, they seem to be moving roughly in the same direction.”
European leaders have taken up Draghi’s idea of a “fiscal compact,” agreeing to a treaty that will speed sanctions on high-deficit states and require euro countries to anchor balanced-budget rules in national law.
There are signs that Draghi’s strategy is paying off. Bloomberg indexes of Europe’s banks and financial conditions are the highest since August, and money-market lending rates and bond yields from Italy to Spain are sliding.
Banco Bilbao Vizcaya Argentaria SA is selling senior, unsecured bonds in the first benchmark offering of the debt from a Spanish bank since October. Intesa Sanpaolo SpA, Italy’s second-biggest bank, sold senior, unsecured bonds last month, and Commerzbank AG, Credit Agricole SA and Allianz SE are also planning to issue unsecured debt.
Intesa Chief Executive Officer Enrico Tommaso Cucchiani said this week that some of the money from the ECB’s three-year tender will be used to buy Italian government bonds.
“If the euro crisis is kept under control, the chances of economic growth returning in the third quarter for the euro zone as a whole are good,” said Christian Schulz, an economist at Berenberg Bank in London.
It remains unclear exactly how big Europe’s permanent financial backstop will be, leaving the ECB exposed in the event of a Greek default, said Nick Kounis, head of macro research at ABN Amro in Amsterdam.
“The lack of a firewall is what ultimately creates pressure for extra responsibility for the ECB,” Kounis said. “If the talks in Athens fail, then they may have to deal with a re-escalation of the whole crisis spiral that we saw last year.”