ECB guarantees the liquidity of the Atlantic financial volume

Mario Draghi, President of the European Central Bank (ECB) gave a press conference on the meeting of the G20 central bankers (EC Audiovisual Services, 25/02/2012).

There is no doubt that the European Central Bank is determined not only to continue supporting Eurozone’s real economy with liquidity at almost zero interest rate cost for as long as it needs to achieve tangible growth, but by the same token it appears ready to succeed the American Fed in keeping the western financial volume liquid. In this way the ECB is emerging as a regular major western central bank, liberated from the traditional ideology of the German central banking institution, the Bundesbank, which tries restricting the role of ECB only to a guarantor of the price level.

It is true though that according to ECB’s statutes Eurozone’s central bank cannot interfere with real economy through policies directly supporting growth. Yet last week ECB’s Mario Draghi said that until Eurozone’s real economy achieves strong growth, interest rates will remain at their very low-level of 0.5% or below it “for as long as it is needed”. He clearly stated that “The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time”.

The new role of ECB

In this way the scenery in ECB has changed completely with Mario Draghi in its steering wheel. Last summer Draghi firmly stated that the ECB “will do whatever it takes to safeguard the Eurozone”, then he added “believe me it will be enough”. He obviously meant that the ECB was ready to go as far as to buy sovereign debt. This prompted the resignation of both the governor of Bundesbank and the German representative in ECB’s governing council, but it greatly reduced the risks associated with the euro. It must be noted that on that occasion Draghi had the support of Berlin, with Merkel letting the two German bankers out in the cold. We will see why.

Obviously the role of ECB was gradually increasing from a Eurozone inflation keeper to something bigger. To this effect in September 2012 the ECB announced its famous Outright Monetary Transactions (OMT) initiative. This was a program, under which the bank could appear as buyer in the secondary sovereign bond markets, under certain conditions, acquiring debt paper issued by Eurozone member-states. Until this day the central bank of Eurozone has managed to greatly contain the borrowing cost of Spain, Italy and Ireland without having to spend not even one single euro.

This brings us to last month’s developments, when the ECB’s governing council decided a major change in its policy principles. The ECB will be from now on ‘guiding’ the markets and not simply guarding for inflation pressures, which are actually not existing. Draghi though had to confirm this once more last week, because there was a misunderstanding in financial markets. The western financial volume was under pressure because the American central bank, the Fed, issued conflicting signs over its intentions about sticking with its relaxed monetary policies or restricting the dollar liquidity.

ECB going global

In view of that the ECB stated last month that it changes its policy principles and starts ‘guiding’ the financial markets for the first time ever, reassuring them ex ante over a long-term accommodative stance, with abundant liquidity at close to zero interest rates. Last week Draghi had to reaffirm that once more. He said “Our monetary policy ( ECB’s governing council)…thereby provides support to a gradual recovery in economic activity in the remaining part of the year and in 2014. Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time”.

The ECB says here in the most solemn way, that it will take care of all the needs of Eurozone’s real economy. indirectly however it also reassures everybody that it will cater also for the liquidity accommodation of the entire Atlantic financial volume, if the Fed goes for a stricter policy. We will see more evidence for that below. This was something markets needed to be reassured of after the Fed started talking about holding back on dollar liquidity. Not to forget that the euro, dollar and English pound financial markets are tightly bound together. To confirm this Draghi noted that, “Recent developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions”. That’s why he had to promise ample liquidity for all at 0.5% or lower interest rate cost.

Undoubtedly in this way the ECB states that it is ready to succeed the Fed in offering the liquidity needed all over the Atlantic financial volume.