ECB may disappoint on new anti-crisis measures

Posted at 09/05/2012 6:17 PM | Updated as of 09/05/2012 6:17 PM

FRANKFURT - Financial markets risk disappointment if they expect the European Central Bank to unveil a cure-all for the eurozone's seemingly never-ending debt crisis this week, analysts warned on Wednesday.

Expectations are running high for the regular monthly policy meeting of the ECB governing council on Thursday after ECB chief Mario Draghi suggested last month the central bank "may" reactivate a contested programme to buy up the sovereign debt of eurozone countries, albeit under strict conditions that are still in the process of being worked out.

But since then, German central bank chief Jens Weidmann has launched a publicity counter-offensive against any such measures.

Furthermore, Germany's Constitutional Court is scheduled to give its opinion on Europe's anti-crisis tools next week, so Draghi will likely opt to hold his fire for now, analysts suggested.

"Those looking for the ECB to announce explicit details (on the bond-buying programme) are likely to be disappointed," said UniCredit economist Marco Valli.

"Don't expect too much, for now. Draghi will -- and should -- remain vague" on the bond-buying programme, Valli said.

The ECB launched its Securities Market Programme (SMP) in May 2010 to help debt-wracked eurozone countries that were finding it difficult to drum up financing in capital markets, and has since accumulated 208.5 billion euros ($260 billion) in bonds issued by Greece, Ireland, Portugal, Italy and Spain.

But the programme was controversial from the start, with two top German officials resigning from the ECB in protest, and the SMP has lain dormant for much of this year.

Bundesbank chief Weidmann -- who insists he is not the only person to suffer "stomach pains" about the programme -- argues the scheme, which has succeeded in bringing down the borrowing costs of crisis-hit countries, is tantamount to monetary financing, where the central bank prints money to pay off a country's debt.

That is expressly forbidden under the ECB's statutes.

Weidmann also fears the measures will fuel inflation, ease the pressure on over-spending governments to get their finances in order and erode the ECB's independence.

Berenberg Bank economist Holger Schmieding said Draghi's "hardline opponents will probably force him to accept compromises that will restrain the ECB's intervention."

Speaking before the European Parliament's committee for economic and monetary affairs this week, Draghi provided some hints as to what the revamped SMP might look like.

He signalled that the ECB would limit the eligible maturities to a maximum of three years.

Another condition might be that countries wishing to benefit would have to request a bailout from one of the eurozone's rescue funds, the EFSF or the ESM, to ensure they continue their reforms.

Newedge Strategy analyst Annalisa Piazza said market players "who expect the ECB to start the new assets purchase as soon as possible are likely to be extremely disappointed as the ECB action will be linked to political developments out of its direct control."

And DekaBank's Kristian Toedtmann similarly said "we shouldn't expect a 'big bazooka' from Draghi."

Of course, the ECB has other tools at its disposal to help fight the crisis fires, such as a reduction in key eurozone interest rates.

Since the crisis re-erupted late last year, the central bank under Draghi has brought benchmark borrowing costs down to an all-time low of 0.75 percent.

Additional easing might be on the cards if the eurozone economy -- which already contracted by 0.2 percent in the second quarter -- weakens further.

Nevertheless, economists are divided as to whether further rate cuts will be announced this week.

Paul Donovan at UBS said he was pencilling in such a move but analysts at RBS were not so sure.

"We continue to believe that a rate cut at this week's meeting is highly unlikely on the grounds that the governing council unanimously rejected a rate cut last month," they wrote in an investors' note.

"Germany doesn't need a rate cut right now and a rate cut won't save Spain. The governing council is moving on the non-standard front and we think it is unlikely (they) will fire all its precious ammunition in one meeting," RBS wrote.

Schmieding at Berenberg Bank agreed.

"The ECB's aim is to make existing monetary policy work, not to make it even more accommodative," he said.

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