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COLUMN-ECB calls in the consultants. Hurrah?: James Saft
August 7, 2014 / 9:16 PM / 3 years ago

COLUMN-ECB calls in the consultants. Hurrah?: James Saft

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(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

Aug 7 (Reuters) - Relax, people, the ECB is going to hire a consultant.

You might think that the threat of deflation, a recession in Italy and some alarming signs of slowing growth in key member states like Germany would call for action from the euro zone central bank.

But this is Europe, and it's August, so instead, apparently, we are waiting for the finishing touches to be put on a contract for someone to advise the ECB about reforming the asset-backed securities market so it can stand to buy the bonds.

"The other news is that we are about to hire ... a consultant to help us design this program in the best possible fashion," ECB President Mario Draghi told the press conference after the ECB left rates on hold and announced no new meaningful initiatives.

It is not known if this consultant is one person or several, nor if he or she possesses a magic loom that can spin straw into gold.

We do know that, while the old, bad ABS market was fatally flawed and fixing it will be complex, we've been discussing its potential resurrection as a fulcrum for monetary policy for some time now. So forgive me if I find the idea that the ECB is "about" to engage a "consultant" who will "help" less than compelling. It's all very prospective, out in the future, and were I a small business person in Belgium suffering from the lack of credit due to the woeful state of the euro zone banking system, I might possibly be a bit impatient.

And yes, the ECB brought a lot of questionable collateral into its ambit in the aftermath of the financial crisis when it was, in essence, the ABS market and deals were tailored with one perhaps not so discriminating client in mind.

So, the issues are complex, to be sure, but Draghi and the ECB seem happy to sit back and let the steps they took in June - a negative deposit rate, targeted long-term refinancings and a cut to the refi rate - take effect. This passivity also has the potentially salutary effect of ratcheting up pressure on member states to speed reforms, something Draghi all but pointed out by noting the large variation in the quality of the so-called recovery across countries.

Tactics or Strategy?

That strikes me as a policy that may amount to good tactics - sit, gather information, increase pressure on other stakeholders - but bad strategy.

The evidence seems clear that performance in the euro zone requires greater steps, but Draghi's testimony seemed too relaxed and lacked urgency.

"The degree of obfuscation and prevarication deployed by Draghi in answering questions about a) the ECB's (unchanged) economic and inflation outlook (endless references to 'technical factors' to explain weakness, and a reversion to focusing on core CPI rather than headline, along with long-term inflation expectations), and b) the risks posed by the Ukraine/Russia crisis (too early, difficult to judge) bordered on the cringe-worthy," Marc Ostwald, strategist at Monument Securities in London, wrote in a note to clients.

Reforms or not, Italy has slipped into recession with a second straight quarter of economic contraction. As for Germany, as a major trade partner of Russia, its problems go well beyond the disappointing showing in its most recent factory orders data. German business sentiment fell in July for the third straight month, the DAX index is down 10 percent over 30 days and some economists predict that GDP data for the second quarter will show a contraction.

Inflation for the euro zone now stands at 0.4 percent, the lowest since October of 2009. And while Draghi was at pains to assert that long-term inflation expectations remained well-anchored, some market prices seem to suggest otherwise. Both German and Italian bonds indicate that investors expect just 0.5 percent of annual inflation over the next five years, according to so-called break-even rates derived from inflation-linked securities. Given that the ECB has a target of just under 2.0 percent inflation, this pretty well justifies a view that the markets are losing faith that the central bank can or will fulfill its mandate.

But still, we shall shortly have a consultant on hand who will, in due course, help to set the ABS market to rights.

Things are looking up. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at (Editing by James Dalgleish)

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