7/28/2019 KBC Preview ECB meeting June

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Tuesday, 04 June 2013

P.1

No new decisions expected, but....

Wedontexpectanymajorpolicyannouncementon

ThursdaysECBmeeting.TheECBtookaseriesof

initiativesatitsMaymeeting(seesummarybelow).

Introducingmoremeasureswouldbedifficulttojustifyat

thisstage.Theunderlyingsituationdidntchange.The

newECBstaffprojections,onwhichwewillbriefly

commentbelow,wontshowsubstantialrevisionsin

growth,evenifthe2013inflationforecastis

downwardlyadjusted.

However,

we

believe

that

two

itemswillmakethepressconferenceafterwards

interesting:facilitatinglendingtosmallandmedium

sizedfirms(SMEs)andtheissueofanegativedeposit

rate.DiscussionsontheseissueswillallowMr.Draghito

showthattheECBhassomebulletslefttouseif

needed.Whetherthiswillhaveanimportantimpacton

marketsisunlikely,asthefocuswillbeonFridays

releaseoftheMayUSpayrollsreport.

Summary conclusions May meeting

AttheirMaymeeting,theECBmadealotofdecisions,

whichtakentogether,certainlyexceededmarket

expectations.TheECBandMr.Draghiapparentlywere

afraidtodisappointmarkets.Thecutoftherefirateby

25basispointsto0.50%waswidelyexpected,butathis

pressconference,Mr.Draghistruckamoredovishtone

thancouldhavebeenenvisaged.Hesuggestedthatthe

ECBwouldbewillingtoeasepolicyfurtherifeconomic

conditionwarrantedsuchdecision.Thiseasingwould

mostlikelycomethroughafurtherreductionofrates,

evenifthatwouldtaketheECBdepositrateintothe

largelyunchartedterritoryofnegativevalues.

Othertakeawaysconcernedliquidity,fiscalpolicyand

lending

to

SMEs.

To

keep

away

any

doubts

that

liquidity

concernswouldpreventbanksfromfinancingfirmsand

households,theECBprolongedtheperiodinwhichECB

liquidityisprocuredunderthefullallotment/fixedrate

proceduretomid2014.Onfiscalpolicy,MarioDraghi

struckaconciliatorytoneinrelationtotheprospectof

somepullbackinthedegreeoffiscalausterityintheeuro

area.Ratherthanexhortingspeedyandsweepingbudget

actionastheECBhasconsistentlydoneinthepast,Mr

Draghiarguedthatcountriesshouldnotunraveltheir

effortstoreducegeneralbudgetdeficits.OnSME

lending,Mr.Draghisuggestedthatnodramaticsupport

initiativesshouldbeexpected.

Minor changes to growth forecast, but inflation outlook will be revised lower

No spectacular new decision is expected, but

Mr. Draghi will signal that ECB has more bullets left.

by talking about SME financing and a negative deposit rate

No action, but more talking

7/28/2019 KBC Preview ECB meeting June

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Tuesday, 04 June 2013

P.2

Economic context slightly better

Theeconomicdataflowhasbeenslightlybetterthanin

thepasttwomonths.Thenewgrowthforecastsshould

belittlechangedcomparedtotheMarchones,but

inflationforecasts,for2013,shouldberevised

substantiallylower.

TheMayEMUPMIsurveywasawaitedwithsome

anxiety,afterthedeclineoftheChinesePMIbelowthe

50threshold.Fearsaboutafasterpaceofdeclining

activitywereoverlypessimisticthough.The

manufacturingPMIrosefrom46.7inAprilto48.3inMay,

asubstantialimprovementandthehighestlevelsince

February2012.Thisindicates,thatwhileactivityisstill

contracting(

7/28/2019 KBC Preview ECB meeting June

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Tuesday, 04 June 2013

P.3

Lending to small and medium sized

enterprises

Inanumberofperipheralcountries,thebankingsectoris

stillindirestraits.Asaconsequence,smallandmedium

sizedfirmshavedifficultiestofinancetheiractivities.The

deepandprotractedrecessionsintheperiphery

weakenedthesolvencyofmanyfirms,makingbanks

reticenttolend.However,weaknessinthebanking

sectorisalsopartoftheproblem. Banklossesdepleted

thecapitalbasisandcapitalrequirementsareregularly

increasedintheBaselframework.Morelendingto

SMEsrequiresmorecapital,thatbanks,witha

weakenedcapitalbasis,cannotraise.Asaresult,many

peripheralbanksdeleverabruptly.Forbiggerfirmsthe

issueislessurgentastheyoftenfindmeansonthe

corporatebondmarket,towhichSMEshavenoaccess.

TheECBisawareoftheproblemsandislookingfor

solutions.Abundantliquidity,whichtheECBalready

delivers,isnoanswer,asitisbasicallyacapital/solvency

problem.Therefore,afundingforlendingtypeof

programme,liketheBankofEnglandrunsandis

propagatedbysome ,haslittlechancetobeadopted.

SeveralECBgovernors,includingMr.Draghisuggested

thattheABSmarket,securitizedloanstofirms,whichis

currentlymalfunctioning,ismorepromising. Oneofthe

reasonstheABSmarketmalfunctions,besidesthetoxic

associationwith

the

sub

prime

crisis,

are

the

haircuts

appliedontheseassets.Thesearetoohigh,diminishing

thevalueofABSfortherepomarket. Inaddition,the

capitalrequirementsforABSarehigherthanmanyother

similarproducts.

Loweringthehaircutisoneoption,butitraisesthecredit

riskfortheECBoranyothercounterparty.Onestep

furtherwouldbetheoutrightpurchaseofABSbythe

ECB.Itwouldlightenthebalancesheetsofbanksand

freecapitaltolendmoretosmallandmediumsized

firms.Variousissuesremainthougheveninthiscase.

First, theECBdoesntliketotakemorecreditriskonits

booksandlooksforotherpartieswhomightbewilling

tobuyABS.TheEuropeanInvestmentbank(EIB),whose

shareholdersaretheEUcountries,isoneobvious

candidate.TheEuropeanStabilityMechanism,whose

shareholdersaretheEMUcountries,maybeanother

candidate.TheEIBisalreadymemberofaworkinggroup

establishedbytheECBtostudyhowtorevivetheABS

market.EUpresidentVanRompuysaidovertheweekend

thatlendingtoSMEsiscrucialfortherecoveryandfor

thefightagainstunemployment.SMEsdeliverthelions

shareof

new

employment.

He

added

that

he

expects

the

EIBtosignificantlyexpandlendingtoSMEs.Van

RompuyseesscopeforjointactionsofECBandEIBon

financingofSMEs.So,onesolutionmightbethatEIB

buysABS,helpingbankstolightentheirbalancesheet

andallowingthemtoplayabiggerroleinfinancing

SMEs.TheEIBlacksthemoneyneededforthese

purchases andsodogovernments.TheECBcouldgive

theEIBtheliquidityneededviareposwithABSas

collateral.Otherschemesarepossibleanditisperhaps

morelikelythatanannouncementismadeatthenext

ECBmeetinginJulyorattheEUSummitattheendof

themonth,butitmightbeoneofthemaintopicsatthe

pressconference. However,evenifthisschemeis

withheld,successisnotguaranteed.Itwillnotonly

dependonloweringthehaircut,butalsoonthepricethe

EIBwantstopayfortheABS.Banksshouldseean

advantageinbundlingSMEcreditontheirbooks,selling

ittotheEIBandreplacingitwithnewSMEloans.AnFT

articlepublishedearliertoday,afterredactionwas

finished,suggeststhattheECBisbackingawayfrom

usingabigbazookatoboostcredit.

Negative deposit rates?

Theissueofapossiblenegativedepositratereentered

thedebateonmarkets.AlreadyinDecember,theECB

presidentsaidthattheECBwasoperationallyreadyto

handlenegativeratesalthoughheaddedthatthe

discussiondidntgointodepthonthispoint.Concerns

thatnegativepolicyinterestrateswouldhavean

uncertainandpossiblydamagingimpactonsome

financialinstitutions

have

made

central

banks

reluctant

tocountenanceactionofthissort.So,theissuewentoff

theradarforsomemonths.AttheMayECBpress

conference,Draghisurprisinglysaid:wesaiditinthepast:wearetechnicallyready.Thereareseveralunintendedconsequencesthatmaystemfromthismeasure.Wewilladdressandcopewiththeseconsequencesifwedecidetoact.Wewilllookatthiswithanopenmindandwestandreadytoactifneeded.ThiswentfurtherthaninDecemberandsuggestedthatifthe

ECBneedstoeasepolicyfurther,itmightdoitvialower

interest

rates,

even

if

it

would

mean

negative

deposit

rates.Afterthemeeting,somegovernorssaidtheywere

surprisedbyDraghiscomments,becausetheissue

wasntseriouslydiscussed.ItseemedtousthatMr.

Draghiwantedtoimpressthemarkets,maybeinthe

samesuccessfulwayashedidwiththeOMTprogramme

andhis,famousstatement,todowhateverittakes.

Westillthinkthatthechancesofadepositratecut

belowzeroaresmall,buttheyarenotzero.Itisakindof

nuclearoption.Anegativedepositratecoupledwitha

lowerrefiratewouldreducemoneymarketratesatthe

frontend

of

the

curve

and

could

turn

eonia

negative.

It

wouldgetroundthezeroratebound. Thiswillcost

bankswithlargeexcessreservesattheECBmoney.To

avoidthis,thecentralbankhopesbankswillusethis

excessliquiditytobuyhigheryieldingassets,tolenditin

7/28/2019 KBC Preview ECB meeting June

4/4

Tuesday, 04 June 2013

P.4

theinterbankmarket,tobuygovernmentbondsorother

assets,ortoincreaselendingtobusinessesand

households.Itisunlikely thatbankswillusethisexcess

liquiditytolendoutmore,ascapitalandnotliquidity

shortageisbehindthecautiousnesstowardslending.

Anegative

deposit

rates

has

many

side

effects

that

are

moreimportantthantheadvantages.Itnegatively

impactstheprofitabilityofthebankingsector,asitis

unlikelybanksincreasetheratestheychargeforlending.

Inthecontextthatbanksneedtobuildbiggercapital

buffers,lowerprofitabilityisnotwhatisneeded.In

Denmark,negativeratesresultedinbanksraisingallkind

ofchargesonlending.Second,moneymarketfunds,an

importantfundingsourceofbanks,mightnotbeableto

guaranteetherestitutionoftheprincipaltotheir

customers.Theymightlosemostoftheircustomers.

Finally,if

banks

do

lower

rates

for

their

customers

to

nearzero,thesemaystarthoardingbanknotes.

IntroducingnegativedepositrateswouldputtheECBin

unchartedterritory.Nomajorcentralbankhasdoneit

before.Itwouldcertainlybedifficulttoselltheideain

countrieslikeGermanywhereaconservativemonetary

policyhasbeenthecornerstoneofthepolicyframework.

Lookingattheindividualopinionsofthegovernorsonthe

issue,thepictureisnotclearyet.ECBEexecutiveBoard

membersAsmussenandMerschseemagainsttheidea

andso

are

BdF

Noyer,

Bubas

Weidmann

and

NBB

Coene.

InfavourareBOIViscoandmaybetheSlovakgovernor

Makuch.Alotofgovernorshavenotmadeuptheirmind

andothersmaychangetheirviewsduringeventual

discussions,whichapparentlydidnttakeplaceyet.

However,marketswillbeverysensitivetoanycomment

ofthesubject.Theeoniastripcurvebrieflyshifted

belowzeroinDecember,whentheideawasfirst

floated,buthassince,alsoaftertheMaymeeting,

remainedabovezero,suggestingthemarketisnot

discountingsuchamove.Ofcourse,surprisesarewhat

thedrives

markets

and

any

quote

from

Draghi

on

the

subjectmaybeveryimportant.

PietLammens,KBCdealingroom

.

BrusselsResearch(KBC) GlobalSalesForce

PietLammens +3224175941 Brussels

PeterWuyts +3224173235 CorporateDesk +3224174582

JokeMertens +3224173059 CommercialDesk +3224175323

MathiasvanderJeugt +3224175194 InstitutionalDesk +3224174625

DublinResearch London +442072564848

AustinHughes +35316646892 Frankfurt +496975619372

PragueResearch(CSOB) Paris +33153898315

JanCermak +420261353578 NewYork +12125410697

JanBures

+420

26135

3574 Singapore +65

533

34

10

PetrBaca +420261353570

BratislavaResearch(CSOB) Prague +420261353535

MarekGabris +421259668809 Bratislava +421259668436

Warsaw Research Budapest +3613289963

BudapestResearch

ALLOURREPORTSAREAVAILABLEONWWW.KBCCORPORATES.COM/RESEARCH

Thisnonexhaustiveinformationisbasedonshorttermforecastsforexpecteddevelopmentsonthefinancialmarkets.KBCBankcannotguaranteethattheseforecastswillmaterializeandcannotbeheldliableinanywayfordirectorconsequentiallossarisingfromanyuseofthisdocumentoritscontent.Thedocumentisnotintendedaspersonalizedinvestmentadviceanddoesnotconstitutearecommendationtobuy,sellorholdinvestments

describedherein.

Although

information

has

been

obtained

from

and

is

based

upon

sources

KBC

believes

to

be

reliable,

KBC

does

not

guarantee

the

accuracyofthisinformation,whichmaybeincompleteorcondensed.AllopinionsandestimatesconstituteaKBCjudgmentasofthedataofthereportandaresubjecttochangewithoutnotice.

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