07 September 2012

Mario Draghi’s Introductory Statement to the Press Conference on 6 September 2012 (Translated and Commented)

I did not plan to specifically write about it, but the nice speech of Mr. Draghi that introduced the 6 September 2012 ECB’s press conference just includes too many questionable statements and, for those who can read it, is far too revealing about the inherent problems in our economic and financial systems to leave it without a translation for the others.

The original speech can be found from the ECB’s website under “Press conferences > 2012 > 6 September 2012”; the first half of it is also reproduced in italic below. The webcast together with the followed Q&A session can also be found under “Webcasts: ECB monetary policy decisions”. Stresses below are my own; my comments and remarks are in brackets. 

Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 6 September 2012

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and by the Commission Vice-President, Mr Rehn.
[Everyone in the audience at least pretends to be pleased too – even though they apparently get a bit bored when Mr. Draghi starts reading the third document; anyway it’s simply a normal way to start this kind of official press conference.]

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. [Okay...] Owing to high energy prices [which are at least partly caused by the ultra easy monetary policies of the central banks; one of the main upside risks for the inflation] and increases in indirect taxes in some euro area countries [introduced because of the unsustainably high government debts and the need for the fiscal consolidation; one of the main upside risks of the future inflation rate] inflation rates are expected to remain above 2% throughout 2012 [inflation is picking up despite of the ECB’s mission to keep it low; rise in energy prices is a good excuse for this, even though related to the ultra easy monetary policies], to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon [this is not known yet; forecasts like this are far too easy to change – even this very same speech includes backdoor excuses for the future]. Consistent with this picture, the underlying pace of monetary expansion remains subdued [because things are not progressing as planned – banks simply do not lend as a result of new regulations and because there is too much debt already]. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term [something does not quite fit here... if inflation cannot be held below 2% right now, how can it be possibly done later given the expected QEs?]. Economic growth in the euro area is expected to remain weak [this makes angry especially those who have not participated in the pre-crisis “party” and are working hard somewhere in the real economy], with the ongoing tensions in financial markets [read: virtually frozen interbank markets, sensible people getting their money out of the banks in eurozone periphery, skyrocketing borrowing costs for some countries – no need to mention, which ones, etc.] and heightened uncertainty weighing on confidence and sentiment [no wonder: after three years of struggling there is still no real solution to the debt crisis which is spreading like ...whatever]. A renewed intensification of financial market tensions would have the potential to affect the balance of risks for both growth and inflation [backdoor for future excuses and making adjustments to what is being said; do I hear sort of warning to Mr. Market?].

It is against this background [but even more importantly, because Mr. Market has not left many other options – and right now he is still dictating a lot] that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area [another great three-letter abbreviation instead of the Securities Markets Programme (SMP) the essence of which is not that clear for outside observers; I found a step-by-step explanation by Barry Norman]. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism [monetary policy transmission mechanism is the process through which monetary policy decisions affect the economy in general and the price level in particular; click on the link above and see on the ECB’s website why markets are applauding to the QE while real economy is struggling; this mechanism is in strike in the middle because of the excessive debt burden, imbalances and inequalities in the distribution of assets, income and financial education] in all countries of the euro area [it’s far from being clear how the OMTs would actually help when it comes to getting monetary transmission mechanism working again; in theory, governments should now do something with the time bought – but their tools are very limited given the heavy debt burden, especially in the so-called periphery]. We aim to preserve the singleness of our monetary policy [what else could the President of the ECB say?] and to ensure the proper transmission of our policy stance to the real economy throughout the area [good intention, but very limited tools as said]. OMTs will enable us to address severe distortions in government bond markets [while at the same time creating new distortions and making “free” markets even more dependent on the actions of the policy makers] which originate from, in particular, unfounded fears [well, until there is no real solution to the eurozone crisis, these fears are not that unfounded; what if a country does not fulfil the terms for qualifying OMTs?] on the part of investors of the reversibility of the euro [preparations had to be done in secret anyway, so this statement does not have much informational value]. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. [The effectiveness of the backstop mainly depends on how well Mr. Draghi has managed to convince Mr. Market – does Mr. Market also believe him next week or next month? The debt problem has not disappeared; it would simply not be this urgent especially when the focus goes now to US because of certain pressing matters.] Let me repeat what I said last month: we act strictly within our mandate to maintain price stability over the medium term [one step back when compared to the mission statement on the ECB’s website: “The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro.” – note no mention of “medium term”]; we act independently in determining monetary policy [while being conditioned by the beliefs and behaviours of Mr. Market, the ability and willingness of the governments to do what they have to do, external factors etc.]; and the euro is irreversible [as far as it is in the mandate of the ECB to protect it – this statement is less conclusive than it seems].

In order to restore confidence [restore confidence – that’s the key, no matter if only illusionary; unfortunately illusionary confidence tends to disappear very suddenly as we have seen], policy-makers in the euro area need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution-building [a clear message to the European policy makers and governments: “We are buying you time, you have to do your job; the direction is towards the fiscal and political union – and every country must become competitive, no matter what.”; it very much looks as mission impossible without a major write-off of debts at least for countries such as Spain...]. At the same time, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist [meaning: governments shall closely monitor the mood of Mr. Market, make a call for help as soon as noticing troubles with their bonds and have an austerity plan ready] – with strict and effective conditionality in line with the established guidelines [here are the terms and conditions to meet; if a troubled country does not meet them...]. The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions for our outright transactions to be conducted and to be effective. [...then the transaction could not be conducted this way, but the country in question would most probably be “helped” in some other way (because the ECB is committed to do whatever it takes to save the euro and itself) which will not be as “pleasant” neither for the country concerned nor for anyone else] Details of the Outright Monetary Transactions are described in a separate press release.
[Note that ECB has just sent out a signal to all eurozone member states and Mr. Market; it urges everyone to put more pressure on troubled countries – so that the Troika would not be deemed as responsible for their woes.]

Furthermore, the Governing Council took decisions with a view to ensuring the availability of adequate collateral in Eurosystem refinancing operations. The details of these measures are also elaborated in a separate press release. [The ECB is going to collect more assets of questionable quality into its already 36 times leveraged balance sheet – a clear sign that financial system has indeed ceased to function. Could the ECB go bankrupt or, more precisely, would its insolvency matter? Some commentators have suggested that ECB insolvency would be merely a technical issue, rather than a practical one. The ECB could potentially cover any capital losses by capitalising its projected earnings from “seignorage” – i.e. the returns it makes on assets it can purchase with the money it (costlessly) creates. The limit of such creation of earnings is still somewhere around EUR 2-3 trillions which is two or even three times less than the total debt hole of eurozone.]

Further, Mr. Draghi explained the above assessments in greater detail. I’ll not repeat this part of the speech as main messages are already included above. Just as a brief summary, he highlighted:
* The environment of heightened uncertainty;
* Expectation of euro area economy to recover only very gradually;
* Risks surrounding the economic outlook for the euro area being assessed to be on the downside;
* Importance of the effective action by all euro area policy-makers;
* Well-anchored long-term inflation expectations (Remark: Keynes has once famously said: This long run is a misleading guide to current affairs. In the long run we are all dead.”);
* The underlying pace of monetary expansion and credit growth remained subdued (Remark: which is simply a reflection of the current troubles – not that the ECB’s balance sheet has been ballooning too slowly...);
* Pushing ahead with European institution-building with great determination is essential.

Apart that the speech is rather depressing when you think about it (a la: “We are trying to do our best; sorry that our best is not good enough.”), it provides a good illustration to some important points concerning finance and economy of the eurozone (as well as the other so-called advanced economies). I’ll summarise these points as well as the considered “solutions” so far in my next blog post or -posts. Until that, if you are wondering where to invest your money and/or time, then my own simple guiding principle is: true assets are still assets even if the value of the fiat money and illusory assets goes to zero. Certain information, certain skills and certain contacts are perhaps the most important assets that one can have... and it takes time and money to find, win, build or acquire these.

No comments:

Post a Comment