Does the ECB have anything left in the locker?

Market expectations about Thursday’s ECB meeting had become quite bullish in the past couple of weeks (see this blog), and Mr Draghi went just far enough to justify those expectations by cutting the main repo rate by 0.25 per cent and the marginal lending rate by 0.5 per cent. This is a clever way of directing more help to those banks which need it most in the south.

Adding to his dovish tone, he talked about cutting deposit rates at the ECB into negative territory, as Denmark has already done (with moderate success), and he hinted that the ECB still has one further repo rate cut in the locker. At the less dovish end of the spectrum, he said that the ECB will not buy government bonds, which does not sound promising for Fed-style QE, should the eurozone economy continue to weaken.

The new programme to create a securitised debt market for loans to small companies (SMEs) is still fairly embryonic. Last July, Mr Draghi transformed global market sentiment merely by promising to establish a programme to buy government debt, and it then took him a month to work out the details of the Outright Monetary Transactions facility. But I doubt whether this latest announcement on the SME programme will have anything like such dramatic effects.

It will really only impress the markets if the ECB is willing to take risk actively onto its own balance sheet, as it did with the earlier covered bond programme. Mr Draghi hinted this might happen, which was surprising to many, but then he appeared to back track, saying that there might need to be guarantees from the European Investment Bank (EIB) or the European Commission.

The Commission is not exactly flush with cash. The EIB has just raised new capital, but probably cannot extend additional lending to SMEs, above its recently announced lending objectives, without risking a credit downgrade. Therefore, to make a difference, the new ECB programme for SMEs needs to involve not just a liquidity provision, but a genuine risk transfer from banks or the EIB (which would package the loans) to the ECB itself. It also needs to be done in tens of billions of euros, which might take a while. The logistics of getting this done are not straightforward.

So it appears that, while the ECB might be ready to buy the debt of the SMEs, it will not buy the debt of eurozone governments. That shows where their current priorities lie, but it leaves open the following question: now that interest rates are (almost) at the zero lower bound for the first time, what will the ECB do if more eurozone-wide monetary easing is needed? As Mr Draghi admitted, there are not many private assets in the eurozone that are eligible for the ECB to purchase.

The ECB still does not seem to have the Fed’s willingness to improvise at the zero lower bound through area-wide government bond purchases, as opposed to measures mainly designed to deal with market fragmentation or dysfunctionality. That issue may soon start to exercise the markets.