European Central Bank Vice President Vitor Constancio comments on ECB interest rates, the bond-purchase program called Outright Monetary Transactions, and the ECB’s new supervisory tasks.
He spoke in an interview in Tokyo today.
“We will keep what we said. We will be, with regard to the OMT program, treated as any other investor. No seniority. We will be involved. It’s our word. I don’t think that you find central banks reneging their word. It was a solid declaration.”
“After a country is in a position to benefit from the program, we will consider the degree of impairment of the transmission mechanism of the country and then we will take a decision to start intervening. And then we will do it during a period of time that will exclude only when the country is subject to a review of compliance to the program. The day-to-day or week-to-week strategy is something we will decide in the moment because it depends on the developments in the markets. We will look into a small set of variables to decide the terms of our concrete interventions. We have worked out all the details inside to have a proper way to reach the decision every day. It’s going to be the executive board of the ECB that takes the responsibility for that. We look at more things, like volatility. So it’s a composite way of looking at it.”
On IMF recommendations for ECB policy:
“The IMF has traditionally said things about countries and economic areas. It’s not new and needs to be expected. It’s part of the role of the IMF in general.”
On deflation risks:
“I don’t see risks of deflation. Our internal analysis doesn’t show that. There were times when we were perhaps more concerned. But that was at the peak of the crisis. But there is no deep recession as it was the case then. We are always observing the data and try to see into the future.”
“The rates are appropriate, as we have discussed in the past two meetings. Clearly we didn’t see the need to move them now. But we are data dependent. We don’t precommit. We want to keep our hands free. I’m not saying it won’t happen but right now it was appropriate. And it is my opinion that we did the correct decision.”
On progress in crisis fight:
“We are making progress and things have improved. Things are encouraging but we need to keep the strategy. Countries need to continue and at the European level we need the continuous implementation of what was promised in the last summit in June. It shows that member states want to deepen integration in several aspects and that’s a very important guarantee about the long-term future of monetary union.”
On the effectiveness of OMT:
“We concluded that neither side can do it alone. We couldn’t do it alone just by having our leg of the program implemented if countries aren’t complying with adjustment. And we would fail in the end. It will not be efficient. We want this to be as efficient as possible and for that we need the two components our program and the countries complying. That makes it totally compatible. The answer is about efficiency of the program. Our program is there to try to help them. Efficiency could be destroyed by an effect of moral hazard. If by starting to do our program, then countries relax, spreads would go up later on.”
On bank resolution:
“Resolution should be there because one of the things that was recognized in the crisis is that in particular for cross-border banks, my thinking is that this is more necessary for big cross-border banks -- we had bad experiences of cross-border banks. We need that. One of the lessons of the crisis for the big banks you have to eliminate is the idea of too big to fail. We must have resolution laws in place that are clear that show to investors that even big banks can be resolved and in Europe as those banks are cross-border we need really the European level of resolution. That is what is more urgent. It should not come long after the start of supervision.”
“Supervision will not start in January. In January hopefully the council regulation will enter into force -- then we’ll have to do a lot of operations and preparations before we can actually start supervising at the EU level. We have to discuss and approve manuals of supervisory standards, guidelines, prepare for decentralization, how this will work, it will take a lot of time. In the proposal of the Commission we would start supervising the big banks on July 1. Well, it could be feasible but demanding because we have to hire a lot of people, that takes time, to build up the teams. It’s demanding in July, if it happens by the end of the year it is still OK. In a way it is more feasible. In some ways it would be easier to start January 2014, to coincide with CRD IV -- it’s not essential, but it would help. Deposit insurance is something that can wait. In some ways one can say that as fiscal union progresses it is not so necessary.”