Welcome to our rolling coverage of the eurozone crisis. Mario Draghi has unveiled the ECB’s bond-buying scheme. By Tom Burgis, Ben Fenton, John Aglionby and Ruona Agbroko on the newsdesk in London and Anjli Raval in New York with contributions by FT correspondents around the world. All times are BST.
21.40 As we close up today’s blog, here is a last US markets round-up from Arash Massoudi in New York:
What a day for equities on Wall Street. US stocks jumped to their highest closing level since January 2008 as investors piled into risk assets.
The benchmark S&P 500 rose 2.04 per cent to finish at 1,432.12. All ten broad sector groups on the index moved more than 1 per cent higher. Financials were among the day’s top performers with bulge bracket banks enjoying hefty gains. Bank of America rose 5 per cent to $8.35, Citigroup climbed 4.5 per cent to $31.12 and JPMorgan Chase gained 4.3 per cent to $38.69. Broadly, the S&P 500 is up 13.9 per cent since the start of the year.
The Nasdaq closed at its highest level since December 2000.
21.27 Here is tomorrow’s FT splash by Michael Steen in Frankfurt, James Fontanella-Khan in Brussels and Michael Stothard in London on how the ECB signals it’s resolve to save the euro.
“This is your bazooka,” José Angel Gurría, secretary-general of the Organisation for Economic Co-operation and Development told the Financial Times. “This is the muscle and the fire power which is quite awesome because effectively, theoretically, it’s unlimited.”
21.05 Here’s Michael Steen’s latest analysis piece on the isolation of Bundesbank president Jens Weidmann, the one member of the ECB’s governing council who withheld his vote on Thursday morning.
The Bundesbank, while stopping short of issuing its own minority report on proceedings, took the unusual step of commenting publicly after the meeting.
Mr Weidmann “regards such [bond] purchases as being tantamount to financing governments by printing banknotes”, it said. “The announced interventions carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers.”
20.58 Mr Moscovici adds that all banks should come within the remit of ECB supervision.
20.47 And some more:
20.40 Peter Spiegel, Brussels bureau chief, on remarks made by Pierre Moscovici, France’s finance minister:
20.36 In New York, FT markets reporter Arash Massoudi says, US stocks appeared poised to finish the day at their highest level since May 2008.
The S&P 500, propelled this morning by the news out of Europe, has held onto to its gains. The benchmark US index has risen 1.8 per cent to 1,428.93. Cyclical stocks have been the biggest beneficiaries of the day’s rally with the S&P 500 materials, financials and industrials index all more than 2 per cent higher on the day.
20.30 Commenting on France’s reaction to the new bond-buying programme, Hugh Carnegy, the FT’s Paris bureau chief says:
In France, which has long called for stronger intervention by the ECB, there were diplomatic statements of quiet satisfaction by President Francois Hollande and his ministers.
What they were really thinking was expressed by Bruno Le Roux, leader of Mr Hollande’s Socialist party group in the National Assembly. He said the ECB decision was a “clear victory” for the president that proved that austerity was not the “unreachable horizon” for Europe and signalled “the end of the reign of liberal orthodoxy”.
“It is the definitive death of Merkozy,” he said, referring to the close partnership of Chancellor Angela Merkel with Nicolas Sarkozy, Mr Hollande’s right-of-centre predecessor.
20.05 Here’s the latest story by Gerrit Wiesmann and Quentin Peel in Berlin and James Wilson in Frankfurt on differences in Germany about Mario Draghi’s bond-buying programme. While Jens Weidmann, the Bundesbank president, has in past weeks led the charge that it put the eurozone perilously close to using the printing press to finance governments, Mr Draghi has an ally in Angela Merkel who quietly defended the new measures.
19.55 Michael Steen, the FT’s Frankfurt bureau chief, tweets reaction from the German press:
19.47 Quentin Peel said when Mario Draghi accepted the prize in Potsdam for his role in preserving and defending the stability of the euro he
made a passionate appeal for steps towards political union to complement monetary, economic and fiscal union. Strengthening democratic engagement at the European level was essential for making the new architecture of the common currency “legitimate”, he said.
19.32 Giulia Segreti, the FT’s reporter in Rome, said Italian prime minister Mario Monti welcomed the decisions taken by the ECB on Thursday, defining them a “step forward for a more satisfying governance of the Eurozone” at the joint press conference this evening with José Manuel Barroso, president of the European Commission.
Though he considered it “premature” to assess whether the defined conditions would be an obstacle for Italy, he assured that his technocrat government would continue with the proposed reforms and policies of rigour for the Italian public accounts, which would “make the request (for an EU bond-buying programme) unnecessary”.
“The word ‘help’ has been downplayed and, starting from today, there are possibilities to confront problems on the single member states, to be used only under conditionality,” Mr Monti said praising the independence of the ECB’s conclusions.
Mr Barroso refused to comment on the decisions announced by Mario Draghi but reiterated that the “ECB cannot and should not finance governments”.
“If the integrity of monetary policy is lacking and if countries commit to fixing their public finances I think the ECB can and should intervene,” he added
Expressing appreciation for the work done by the Italian government, Mr Barroso said that “ Italy has taken its destiny in its hands – the direction is the correct one but the path is long”.
19.25 In light of the German central bank’s opposition to the ECB’s bond-buying plan, the FT’s Michael Steen says:
In Germany, there are already fears that the Bundesbank has suffered a mortal defeat in failing to persuade others that the bond-buying programme is “tantamount to financing governments by printing banknotes” (as the bank itself said in a rare public reaction to the ECB’s decision). The website of the respected daily newspaper Die Welt headlined its main story: “Financial markets cheer the death of the Bundesbank“.
19.20 In his speech to the Potsdam conference, Wolfgang Schaeuble, German finance minister, praised Mr Draghi for showing “exemplary responsibility” in his role as head of the ECB, but stopped short of passing public judgment on his bond-buying plan, says Quentin Peel.
He warned that the painful path of reform would still take a long time, as eurozone states sought to restore their competitiveness. But he expressed his confidence that Europe was making real progress in resolving the crisis, buying time for all the eurozone members to restore sound public finances and revive economic growth.
He was followed by Paul Achleitner, chairman of Deutsche Bank, who delivered the speech awarding the Potsdam prize to Mr Draghi. He said that “the history books will say of him, he was the right man in the right job, at the right time.” Given the timing of the presentation, the ECB president could hardly have asked for more.
19.12 Spain will not be forced into requesting a rescue until the attached conditions become crystal clear, senior officials in Madrid told the FT’s Miles Johnson and Peter Spiegel. Here are extracts from their latest story:
After Mario Draghi, European Central Bank governor, made clear that any assistance from the central bank to reduce Spanish borrowing costs would come with “strict and effective” conditionality, the Rajoy government remained steadfast in its view that a request would only be made if, and when, it is ready.
“There is no urgency,” a Spanish official said following a joint press conference between Mr Rajoy and Angela Merkel, where the German Chancellor deftly avoided a series of questions over possible new conditions for Spain.
But bravado aside, Mr Rajoy now faces a decision that will define the 57-year-old Galician’s political career and shape the outcome of the Eurozone debt crisis. “Now the ball is in our court, as the government will have to publicly ask for a rescue,” said Jordi Fabregat, professor of financial management at Esade business school.
19.03 Speaking at the Potsdam event Wolfgang Schaeuble, German finance minister, said the ECB’s independence is something to value highly and politicians must show a “high degree of restraint” when commenting on its decisions. He added that the EU will become “irrelevant” if it cannot unite and push for closer integration.
18.55 The FT’s Quentin Peel in Berlin says Mario Draghi got a remarkably warm reception when he arrived in Potsdam — former royal residence of the kings of Prussia — in the early evening, to receive a prize for his contribution in tackling the eurozone crisis.
He was greeted at the pillared entrance to the Orangerie palace by
Wolfgang Schaeuble, German finance minister, with the words: “all as we agreed?”“Absolutely!” Mr Draghi replied with a grin. Schaeuble has just begun to speak at the event. Perhaps we will learn what he means.
18.38 Italian Prime Minister Mario Monti welcomed the ECB’s decision to launch a bond-buying programme, but failed to say whether Italy would ask the ECB for help to reduce its borrowing costs (via Reuters).
“Today there’s been an important step forward – after the decision of ECB President Mario Draghi – toward a more satisfactory euro zone governance,” Mr Monti said.
Monti added that it was “premature to say” whether the conditions tied to the central bank’s bond buying would be an obstacle for Italy to request its help.
“I much appreciated that the ECB, in its independence, which must be rigorously respected by each member state, arrived at this decision,” Mr Monti said.
Mr Monti spoke before his meeting with European Commission President José Manuel Barroso, who also supported the ECB’s plan.
“The ECB cannot and should not finance governments but if the integrity of monetary policy is lacking and if countries commit to fixing their public finances I think the ECB can and should intervene,” Mr Barroso said.
18.33 Matt Steinglass, the FT’s Netherlands correspondent, notes comments made today by the Dutch premier:
Mark Rutte suggested qualified support for the ECB move in a debate with rival party leaders. The Netherlands faces elections on September 12 in which measures to solve the euro crisis have become a central point of contention.
The far-right populist Geert Wilders characterised the ECB move as “opening up the money faucet,” and asked Mr Rutte whether he supported that.
“The ECB is not just opening the faucet,” Mr Rutte replied. “The ECB has a remit to hold the euro together.” He noted that the ECB would sterilise its purchases of bonds, limiting the impact on the money supply.
18.20 Here’s a US markets update from Vivianne Rodrigues, capital markets reporter in New York, after today’s news out of Europe and ahead of crucial US jobs data to be released tomorrow.
The news out of Europe also sparked a rally on Wall Street, while US Treasuries sold off. The S&P 500 climbed 1.3 per cent to 1,422.14 and hit a new intraday high for the year. The broadest measure of US stocks has been buoyed of late by hopes of central bank action both in Europe and the US. The index is now up more than 13 per cent since the start of the year.
In contrast, demand for government bonds fell, with the yield on the US 10-year note climbing 6 basis points to a tktk-high of 1.65 per cent.
In the currency markets, analysts said the combination of a stronger-than-expected private reading on the US jobs markets and the ECB downward revisions to growth has helped the US dollar recover from earlier losses. The dollar index was 0.1 per cent higher, while the single currency slid 0.2 per cent to trade at $1.2578.
“The ECB’s bond-buy plan also enables the Fed to buy plenty of time market pressure is relieved off any further central bank uncertainty,” said Ashraf Laidi, chief global strategist at City Index. In addition, he said, the strong reading on private jobs data “supports our stance that no QE3 will take place this month.”
The focus in the US now may change to a key government report on non-farm payrolls due on Friday and next week’s FOMC meeting.
18.12 Hello all, here’s a quick round-up of today’s events:
- Mario Draghi, the European Central Bank’s president, unveiled a new programme to make unlimited purchases of government bonds of struggling eurozone economies.
- The plan, which comes with conditions attached, will help countries implementing economic reforms to raise money at more favourable rates on the bond markets. This in turn will help them finance their debt burdens and lower the risk they might default on their bond payments.
- While prompting a positive market reaction, the downside is that the decision transfers more risks from struggling banks and governments onto the ECB’s balance sheet, without providing any fundamental solution to the crisis.
- While Mr Draghi warned that bond buying would stop if governments did not comply with the conditions, some say it will be impossible for the ECB to impose effective conditionality on debtor countries. The ECB has to hope that a series of unpredictable political decisions in member states will go in its favour.
- Germany’s Bundesbank has publicly voiced its opposition to the bond-buying plan.
- Yields of Spanish and Italian bonds have fallen on the back of expectations that the ECB would restart its bond-buying.
17.41 And on that note, it seems appropriate to pass the baton from London to New York, where the FT’s Anjli Raval will be picking up this live blog from here on in.
17.36 With the fortunes of the US economy — and thus the re-election prospects of the US president — closely wedded to the performance of the eurozone, Time correspondent Michael Crowley hazards:
17.32 Open Europe, the think tank, has put together a handy primer on the OMTs. In particular, it takes issue with the notion that the ECB has done enough to prevent moral hazard by saying it will pull the plug if beneficiaries renege on their reform commitments (our emphasis).
With respect to countering moral hazard, this is far from enough. Previous bailout programmes have shown the eurozone is hesitant to revoke funding even when conditions are breached.
Absent becoming a fully-fledged political body (which would most certainly violate its mandate), the ECB will find it virtually impossible to effectively enforce conditionality. The only option it has is to withdraw funding, however, this will be impossible to do without causing huge market distortions as states become reliant on this cash flow. Crucially, there’s still no exit strategy for countries to get off ECB funding.
There is clearly a time lag between the assessment of conditionality (often done on a quarterly basis) and the on-going purchase of government bonds.
17.21 More thoughts from the bosses of Pimco, the world’s biggest bond fund. Bill Gross weighed in on Twitter (see 15.26). Now Mohamed El-Erian, chief executive, has had his say on the FT’s A-List.
Thursday’s ECB actions can significantly close the gap between private capital outflows and what, until now, have been lagging official policy reactions. They would reduce the tail risk of immediate fragmentation. But it remains to be seen whether this latest policy sprint can totally eliminated the gap, thus putting in place conditions for a reversal in capital outflows.
Our analysis of the underlying drives of financial flows suggests that policy still needs a further nudge to get ahead of the de-leveraging. Specifically, exploiting the window offered to them by bold ECB actions, national and regional policy entities need to implement – rapidly, comprehensively and simultaneously – the list of corrective measures that have been widely discussed in official circles but languish on the drawing board.
The full piece is here.
16.44 Christine Lagarde appears to be very much onboard with Mario Draghi. Earlier, the ECB chief said he would prefer the IMF to be involved in overseeing the conditions under which the central bank would buy sovereign bonds. Now the head of the IMF has put out a statement that suggests she hasn’t got a problem with that (our emphasis).
“We strongly welcome the ECB’s new framework, the Outright Monetary Transactions (OMT), for intervention in sovereign bond markets of countries accepting EFSF and ESM [the eurozone bailout finds] support for their macroeconomic adjustment programs and adhering to the associated structural and fiscal reform efforts. The IMF stands ready to cooperate within our frameworks.
“Decisive implementation of the new intervention program will help repair monetary transmission, and support countries’ efforts to secure finance at a reasonable cost while they undertake sustained macroeconomic adjustment. We see the ECB’s action as an important step toward strengthening stability and growth in the Euro Area.”
16.43 A happy finish for European stocks.
16.28 The Bundesbank has roared its disapproval of today’s moves by Draghi. Lest we forget, the German central bank staunchly opposed the ECB’s bond-buying programme — a step that marks, for some observers, the end of the German dominance of European monetary policy. Here is the Bundesbank statement, as carried by Reuters (with our emphasis):
In the most recent discussions, as before, Bundesbank President Jens Weidmann reiterated his frequently substantiated critical stance towards the purchase of government bonds by the Eurosystem.
He regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy. The intervention purchases must not be permitted to jeopardise the capability of monetary policy to safeguard price stability in the euro area.
If the adopted bond-purchasing programme leads to member states postponing the necessary reforms, this will further undermine confidence in the political leaders’ crisis-resolution capability. This underscores the crucial importance of ensuring both credibility in the promised conditionality and the resolute determination to immediately terminate intervention purchases if the underlying conditionality is no longer assured.
The announced interventions in the government bond market carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers. Such risk-sharing, however, can be legitimately authorised solely by democratically elected parliaments and governments.”
16.22 In New York, the news from Europe helped lift Wall Street stocks to their highest intra-day level since May 2008, reports FT markets reporter Arash Massoudi
By 11.10am in New York, the benchmark S&P 500 index had risen 1.8 per cent to 1,428.52 as investors were encouraged by remarks made earlier in the morning by Mario Draghi, ECB president. Ahead of tomorrow’s important non-farm payroll jobs report for August, US stocks were further bolstered by a better-than-expected private sector jobs report.
JJ Kinahan, chief derivatives strategist at TD Ameritrade, said: “Draghi, backed into a tough situation, said what people on Wall Street wanted to hear. He talked about supporting the euro under any circumstance a few weeks ago and his statements today reinforce that he plans on doing so.”
After some see-sawing, there’s a similar bounce at the end of the European trading day. The FT’s Alexandra Stevenson writes:
Markets seem to have given Draghi a vote of confidence, as European banking stocks surge in late day trading.
French lender Natixis is up more than 9 per cent, while Credit Agricole has climbed 8 per cent. Italy’s UniCredit is up 7.7 per cent and Germany’s Deutsche Bank rallied 6.5 per cent.
“Today’s announcement has obviously removed a touch more of the risk in markets,” Neil Wilkinson, fund manager at Royal London Asset Management, said.
The FTSE Eurofirst 300 bank sub-index is up 4 per cent at 404.72, while the FTSE Eurofirst 300 has gained 2.2 per cent to 1,103.40.
16.15 BAZOOKA WATCH In Brussels, the FT’s James Fontanella-Khan has been speaking to José Angel Gurría, secretary-general of the Organisation for Economic Co-operation and Development, the rich nations’ economic watchdog. Of the ECB’s move, Gurría says:
“This is your bazooka, this is the muscle and the fire power which is quite awesome because effectively, theoretically, it’s unlimited.”
The OECD boss said that the depths of the crisis had also swept aside any risk of moral hazard linked to the bond-buying scheme.
“There is much better understanding of the implications now. At the beginning people said there was a moral hazard issue … now we are beyond moral hazard, people understand, it’s the euro that is at stake, the stability of the system and therefore they are treating this in a much more thorough and serious way.”
16.05 Has the ECB’s bond-buying ruse created a schism in the bond markets by targeting only paper with maturity up to three years? Yes, according to an analyst quoted by Reuters.
“The difference between the short-dated and the longer- dated bonds shows that investors feel comfortable that they are holding hands with the ECB in buying shorter-dated notes,” said Craig Veysey, head of fixed income at Principal Investment Management Ltd. in London, part of Sanlam Group, which oversees $72 billion. “There’s considerable risk in having a longer-term investment.”
15.42 To Berlin, where Reuters is quoting economy minister Philipp Roesler as saying that ECB purchases of sovereign debt were no permanent solution.
“It is all the more important to attach conditions to the current temporary bond purchases and to lay out as quickly as possible the exact nature of these conditions for individual countries.”
15.31 Why are we seeing the euro lower even as the peripheral bond markets are recovering? Alice Ross, the FT’s currencies correspondent, explains:
Apparently hedge funds are taking profits on the euro having bet yesterday it would go higher, while the currency market as a whole has already shifted its attention to QE3 in the US. With stronger than expected jobs figures out in the US earlier today, that’s making people bet that non-farm payroll figures tomorrow — a key indicator of the health of the US economy — could also be higher and lessen the odds of QE3. Hence the dollar is rising against the euro.
15.26 Dousing fires in the bond markets is all very well but what about growth? Bill Gross, manager of Pimco, the world’s biggest bond fund, opines on Twitter:
Other bond market investors appear cheerier. The yields on Spanish benchmark 10-year bonds fell 35 basis points to their lowest point in six months and those on Italian 10-years fell 15bp to their lowest in four months.
15.19 Following the political waves rippling out from Frankfurt, next to Madrid and the FT’s Miles Johnson.
With Mario Draghi having knocked the ball firmly into the court of the Spanish government, Madrid appears intent on knocking it right back.
A Spanish government official said the government had “no urgency” to request a rescue, and no time frame over which to do so. Any decision would be studied “with much caution” and nothing would be done until Madrid knew if the structure would be “adequate for our needs”.
This came after Mariano Rajoy and Angela Merkel danced around many of the most urgent questions at a joint press conference in Madrid.
Angela Merkel said she was “impressed” by the “consistency” of the reforms enacted so far by the Rajoy government and denied Germany had placed new conditions on the table ahead of a possible rescue.
Mr Rajoy restated the reforms his government had undertaken, arguing that Spain’s high borrowing costs were “in a large part owed to the uncertainty that surrounds the European project”.
15.03 To Brussels, where Peter Spiegel, FT bureau chief, explains what Draghi’s moves today mean for the power-games among eurozone members.
From a political perspective, Draghi has made life very difficult for Mariano Rajoy, who must now decide whether he wants to accept an ECB bond-buying programme with some very strong strings attached.
First, Draghi made clear that any ECB assistance will come with “strict and effective” conditionality – meaning none of the “conditionality-lite” programmes that Spain received as part of its bank bailout and hoped to get under a bond-buying deal.
Perhaps more importantly, at least from a symbolic perspective, is Draghi’s insistence that the IMF will be sought for the “design” and “monitoring” of any new ECB programme. Draghi said later in the press conference that while the EU can’t dictate to the IMF, the Fund’s involvement would be his “preferred” route.
This basically means that any conditions will be drawn up and overseen by the same kind of “troika” mission made up of the ECB, IMF and European Commission that full-scale bailouts must accept – missions that have become politically poisonous in Greece and Ireland.
The market’s glare now shifts to Madrid, and Rajoy has a very difficult decision ahead of him.
14.52: If you are looking at currency markets to help with your augury of the ECB announcement, the FT’s Alice Ross suggests a helpful prism:
14.50: Some reaction from those contemplating Draghi Day.
Andrew Wilkinson, chief economic strategist at Miller Tabak & Co: “One month ago the market and media reaction shifted seismically during the ECB’s August press conference. This time around it appears that all of the leaks ahead of the September meeting may have prepared the markets better…”
14.46: Meanwhile, Reuters reports that:
Hungarian Prime Minister Viktor Orban on Thursday rejected International Monetary Fund and European Union conditions in return for financial assistance and said his government would work out a set of alternative proposals of its own.
“The list (of conditions) is long, it can be read in the press,” Orban
said in a video published on his Facebook page, confirming the details
published earlier by the conservative daily Magyar Nemzet.“The parliamentary group meeting took the view, and I personally agree
with it, that at this price, this will not work,” he said.
You have to admire a prime minister who makes statements of that magnitude on a video posted on his Facebook page. Last people we saw doing that were the FARC in Colombia.
14.39: Here is the quickest of takes from Claire Jones and Michael Steen, who those watching the Draghi press conference may have heard asking the ECB chief a testing question on what he would do about the “distorted” strength of the German bund. That is called multitasking.
14.30 And that’s it. Draghi was grilled for an hour and is now swishing from the press conference.
While he was speaking, German chancellor Angela Merkel was asked during a visit to Madrid for her response to the ECB’s new bond-buying programme. Bloomberg quoted her as saying:
“What I can say is that the European Central Bank is acting with independence and within the framework of its mandate, and that it is responsible for monetary stability and that it is introducing its measures within the framework.”
14.27 Some pithy reaction to all this, courtesy of FT currencies correspondent Alice Ross.
14.25 Draghi clarifies, in answer to a question about Portugal and Ireland, that the OMTs can only kick in when bailed-out countries regain access to the bond market. All eyes on Spain, then…
14.20 Draghi is looking to hammer home the message that he is not undermining those who are trying to use the crisis to make Europe’s political rulers push through economic reforms:
“We are convinced that there is no intervention by any central bank that is effective without the concurrent policy action by the governments.”
Draghi is asked about a poll showed a lack of trust in him among Germans (09.37):
“In the end, the proof is in the pudding. If the action of the ECB under my presidency maintains price stability as it has done so far … I think the trust will be regained.”
14.18 European markets touched session highs briefly as Draghi addressed reporters, says the FT’s Alexandra Stevenson on the markets desk.
Mr Draghi’s comments that the “euro is irreversible” sent markets higher even before he began to detail the ECB’s plans to buy distressed eurozone sovereign debt.
Spanish and Italian stocks extended strong gains from Thursday morning’s session. Spain’s Ibex 35 index climbed 1.8 per cent to 7,627.5, while Italy’s FTSE MIB also rallied 1.8 per cent to 15.401.35.
The FTSE Eurofirst 300 was up 1 per cent at 1,090. Germany’s Xetra Dax index rallied 1.4 per cent to 7,060.25, while the French CAC40 gained 1.4 per cent to 3,453.29.
14.13 Here is the full (although perhaps not as detailed as some would have liked) outline of the bond-buying programme, direct from the ECB:
Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.
14.12 Draghi repeats that there will be no limit on the amounts the ECB can spend on its bond buying programme. No wonder tongue-in-cheek reaction is pouring in:
14.09 More from FT currency guru Alice Ross:
14.05 The FT’s Michael Steen asks in the absence of any stated cap on yields, the ECB will judge the level at which it will intervene and buy a government’s bonds.
Draghi says “repairing monetary policy transmission is complex”. The ECB won’t only be making its call based on yields but also on spread, credit default swaps and volatility.
14.04 Here is the full text of Draghi’s initial statement (not the one with the nuts and bolts of the bond-buying programme, which doesn’t seem to have been published yet).
14.02 Reuters has put out a helpful selection of Draghi’s key points so far:
CONDITIONS FOR BOND BUYS
Bond buys linked to “strict and effective conditionally attached to” … a European rescue programme.
The ECB will consider “outright monetary transactions to the extent that they are warranted from a monetary perspective” and as long as conditionality is respected. Purchases will be focused on “the shorter part of the yield curve” especially 1-3 yrs.
WITHIN ECB MANDATE
“We are sure that we are acting within our mandate. We are not violating article 123″ of the Lisbon treaty.
OMTs NEED EFSF/ESM FIRST
“Governments must stand ready to activate the EFSF/ESM in the bond market … in line with the established guidelines. The adherance of governments to their commitments and the fulfillment by the EFSF/ESM of their role are necessary conditions for our outright transactions to be conducted and to be effective.”
EFFECTIVE BACKSTOP
“Under appropriate conditions, we will have a fully effective backstop to avoid distractive scenarios. Let me repeat what I said last month. We are strictly within our mandate to maintain price stability over the medium term. We act independently in determining monetary policy and the euro is irreversible.”
AIMS OF OMTs
“We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the euro area. OMTs will enable us to address severe distortions in government bond markets, which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”
ECONOMIC GROWTH TO REMAIN WEAK
“Economic growth in the euro area is expected to remain weak with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment. The renewed intensification of financial market tensions will have the potential to affect the balance of risks for both growth and inflation.”
INFLATION TO STAY ABOVE 2 PCT
“Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2 percent throughout 2012, 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.”
PRICE RISKS
“Risks to the outlook for price developments continue to be broadly balanced over the medium term.”
DOWNSIDE ECONOMIC RISKS
“The risks surrounding the economic outlook for the euro area are assessed to be on the downside. They relate in particular to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. These risks should be contained by effective action by all euro area policymakers.”
ECONOMIC OUTLOOK
“Looking beyond the short term, we expect the euro area economy to recover only very gradually. The growth momentum is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, by the existence of high unemployment and by an uneven global recovery.”
FISCAL CONSOLIDATION
“In order to restore confidence, policymakers in the euro area need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution building.”
14.00 Draghi feels the need to stress that the ECB is retaining its independence. He stresses that the ECB has given guidelines on the conditions for its intervention in sovereign bond markets. But it is for institutions of the eurozone to design the details of those conditions. That, he argues, maintains the bank’s independence.
13.56 Draghi is asked a perceptive question. If the ECB will suspend bond-buying if a country breaks its bailout terms, does that also mean it will have to suspend its independence to make the decision (on the grounds that such decisions on conditions are clearly political).
He counters:
We are in a situation now where you have large parts of the euro area in what we call a bad equilibrium. You may have self-fulfilling expectations that feed on themselves and generate very adverse scenarios. This would justify the intervention of the central bank.
But, he adds, “policy mistakes” was what caused the problems in the first place. If the ECB intervened without any conditionality, “it would not be effective and it would lose its independence”.
13.54 Peter Spiegel, FT bureau chief in Brussels, reckons the upshot of the ECB’s decision means Spain will have to submit to oversight of the sort that has caused such indignation in Greece.
13.53 Draghi is batting off questions about what right he has to declare the euro “irreversible”. Now he’s asked about the “lira-isation” of the euro, a reference to what Draghi says is a “caricature” of a “southern cabal” running the show. The vote was near-unanimous, he reminds the questioner. He also insists that the bank is acting within its mandate — which forbids it directly to fund governments directly — because the bond purchases will be on the secondary market.
13.49 Draghi says there was one dissenting view on the board. He won’t say who that was. We couldn’t possiIT WAS THE GERMANSbly guess.
13.46 All the bond purchases will be sterilised, Draghi says. Each month, the ECB will publish its holdings by country.
The ECB’s previous bond-purchase programme, the SMP, is hereby terminated.
13.44 The programme will apply to bonds of maturity between one and three years. THERE WILL BE NO CAP FOR YIELDS.
The ECB will be treated the same way as any other bond buyer.
13.43 Now Draghi turns to the details of Outright Monetary Transactions (bond-buying to the likes of you and I).
Strict and effective conditionality attached to an EFSF/ESM programme. Either a full adjustment programme or a conditional credit line.
The involvement of the IMF shall be sought, in part to monitor the programme.
The ECB will consider buying bonds from a monetary policy perspective.
A CRUCIAL POINT If the government fails to comply with the bailout terms, the ECB will stop buying its bonds.
13.41 Good progress has been made, says Draghi, but need for reform remains across Europe. “On the fiscal front, it is crucial that governments take all measures to achieve their targets.”
13.40 Alice Ross, FT currencies correspondent, has instant market reaction — even before Draghi has fleshed out his plans.
13.37 FT Brussels bureau chief hears in Draghi’s comments a message to Spain, the focus of eurozone nerves just now.
13.35 Draghi will come momentarily to the details of the bond-buying programme. For now he’s explaining that the ECB has cut it’s eurozone growth forecasts to between -0.6 per cent and -0.2 per cent for this year and between -0.4 per cent and 1.4 per cent next year.
13.33 “Draghi: The adherence of governments to their commitments [is] necessary conditions for our outright transactions to be conducted and to be effective.” He means that, for governments to have the ECB buy their bonds to bring down yields, they will have to take their bailout medicine.
13.30 Now to bond-buying details:
We aim to preserve the proper transmission of policy stance to real economy throughout euro areas.
OMTs (as bond-buying will be known) will be “a fully effective backstop” to avoid destructive scenarios.
We are strictly within our mandate, Draghi insists.
There will be conditions — but no details yet.
The euro is “irreversible”.
13.27 And we’re off. Draghi says:
On the rates decision:
High energy prices and tax rises mean inflation to remain above 2 per cent in 2012, fall below next year.
Monetary expansion still subdued. Inflation expectations anchored.
Growth in euro area to remain weak. Ongoing tensions in financial markets to weigh on confidence.
13.26 The ECB’s live feed of Draghi’s press conference will be here.
13.24 While Mario Draghi prepares for possibly his biggest moment, the wag who operates his spoof Twitter account has responded to the fire alarm at the ECB’s Frankfurt HQ thus:
13.14 Alarm over.
Is it possible that someone at the ECB took calls for emergency liquidity a little too literally?
13.10 Right. Well none of the analysts predicted this…
13.05 From Frankfurt, as we enter the final 30 minutes before Draghi’s big moment, we can confirm that FT bureau chief Michael Steen is homing in ECB Towers.
13.02 European markets barely moved from morning highs after the European Central Bank announced it left the refinancing rate on hold at 0.75 per cent, reports the FT’s Alexandra Stevenson on the markets desk. Markets around Europe are still in positive territory. The FTSE Eurofirst300 is up 0.6 per cent at 1,086.17.
Germany’s Xetra Dax + 1.2 per cent at 7,047.86
French CAC 40 + 1.1 per cent to 3,441.59
Spain’s Ibex 35 +1.6 per cent to 7,615.7
Italy’s FTSE MIB +1.3 per cent to 15,327.66
Athens flat at 775.25
12.59: Having surprised with the hold on rates, will the ECB surprise again in half an hour with its press conference on next-stage strategies? Will market nervousness, having failed to guess right on rates, lead to more market nervousness, so to speak?
12.53: More from Alice Ross on the Euro rally:
The euro shot to a session high of $1.2650 against the dollar after the ECB held interest rates. The single currency failed to hold onto its immediate gains as investors waited for further details in the highly anticipated speech from Mario Draghi, ECB president at 13.30 BST. But investors remained optimistic, with the euro trading well above $1.26 all morning, close to two-month highs.
12.51: Here is the ECB’s full statement on the rate decision, which we predict will not take much time to read.
12.49: First reaction from our currency expert Alice Ross:
12.48: Euro rallies immediately on ECB decision to leave rates unchanged. Market expectations of a cut being corrected now. But increases chances of a bond buying plan.
12.46: ECB leaves marginal bank rate unchanged at 1.5 per cent.
12.45: ECB leaves central bank rate unchanged at 0.75 per cent.
12.38: In the calm before the storm, Peter Spiegel tweets from Brussels:
12.30: For those who prefer the old-fashioned way of reading news stories i.e. online instead of in exciting live blog formats like this one, here is Chris Giles’ report on the Bank of England’s steady-as-she-goes announcement from 12.00.
12.20: Stoking the fires ahead of the 12.45BST announcement from the ECB, Peter Spiegel, FT Brussels bureau chief, writes:
In Brussels, most officials are — like everyone else — watching the smoke signals coming from Frankfurt, where Olli Rehn, the EU’s economic chief, and Jean-Claude Juncker, the Luxembourg prime minister who heads the eurogroup of eurozone finance ministers, are joining the central bankers in their deliberations.
José Manuel Barroso, president of the European Commission, the EU’s executive branch, just completed an address to a policy conference on European unemployment. Although Barroso did not mention the ECB decision, he did paint a dire picture of what is at stake:“We need to face a crisis which is not just a financial and economic crisis, but also a crisis of confidence in our future, of credibility of our institutional framework, of respect for our values,” Barroso told the conference. “There are many factors which have contributed to the current situation. But at the core is the sense that – for the first time in 50 years – our citizens look to their long term economic future with great uncertainty, rather than the expectation of a better life.”
12.16: Chris Giles, the FT’s economics editor, is predictably unmoved by today’s announcement from the Monetary Policy Committee:
“The Bank of England surprised absolutely no one with its decision to keep monetary policy on hold today. UK data remains all over the place and the existing programme of quantitative easing still has two months to run. It would have been impossible for the BoE’s monetary policy committee to come up with a convincing argument that anything decisive had changed since it last changed the QE amount in July. So it did nothing. I don’t expect an exciting set of minutes in two week’s time either”.
12.12: Presenting, courtesy of the Spanish newspaper La Razón: Merghi, an image to strike fear into the heart of recalcitrant central bankers and prime ministers around the Eurozone.
12.04: As we recover from the shock of no news from the Bank of England, over at FT Alphaville, David Keohane has been skewering some of the day’s red herrings, with a little help from Nouriel Roubini on conditionality and with a help from a JPMorgan analyst, answering the question on everybody’s lips: just exactly what does the ECB mean by “sterilisation”?
12.00: BREAKING NEWS: Bank of England holds rates at 0.5 per cent and holds QE at £375bn
11.59: Reuters reports that Pier Carlo Padoan has expanded on the points made this morning by the OECD, of which he is chief economist:
“The euro area remains a crucial point, the epicentre of the crisis,” he says.“It needs to be addressed for its own sake; it needs to be addressed for the stability of the global economy. It is critical that the ECB can go ahead with bond market interventions.”
11.58: The highly respected Leuven University economics professor Paul De Grauwe has a simple plea on Twitter:
11.46: The FT’s Miles Johnson writes from Madrid that Spanish prime minister Mariano Rajoy is trying to set terms of any rescue of his country’s economy:
Mr Rajoy has called for a move away from “orthodox thinking” in solving the eurozone crisis, asking for leaders “to be flexible” in a thinly veiled request to Angela Merkel ahead of the two leaders sitting down for lunch in Madrid today.
With speculation in Spain focusing on Mr Rajoy using the meeting to convince the German Chancellor to agree to a “soft rescue” with no harsh new conditions, the Spanish leader told the Frankfurter Allgemeine Zeitung: “It is important in life to have principles, nut sometimes it is good to be flexible”.
It will not be easy, with few expecting Ms Merkel to acquiesce to the stigma-free assistance Mr Rajoy so desires. A joint press conference will take place at 2.30 Madrid time, when most eyes will be on a certain Mr Draghi over in Frankfurt.
11.38: The aforementioned Michael Steen has cast aside his damp seaweed (see liveblog entry for 11.15) in favour of his keyboard to predict more dark clouds, but in the metaphorical troposphere rather than the physical:
Amid the huge anticipation stoked by the ECB’s proposed bond-buying programme, what might risk getting ignored is that it is that time of year when the central bank offers up another quarterly growth forecast for the eurozone. It is likely to provide gloomy reading. The ECB expresses its gross domestic product growth (or contraction) forecasts as ranges, but for the sake of brevity, these are the midpoints of what they predicted in June: this year will see a contraction of 0.1 per cent for the region as a whole while 2013 will see a return to growth of 1 per cent.
Economists are expecting a downward revision of those projections — which in normal times would be a justification for a rate cut. We won’t know for sure until 12:45 whether the bank has decided to cut rates (and a survey of 70 economists by Reuters last week found them to be pretty much split down the middle). But the argument against a rate cut is as follows. Mr Draghi’s justification for a new bond-buying programme is that he needs to fix the “transmission mechanism” by which interest rates set in Frankfurt act as the guideline* for bank loan rates that a company in Seville would pay. Right now, that mechanism is broken, the ECB says, because markets are pricing in “convertibility risk” or in other words: the risk of countries like Spain and Italy leaving the euro. So if the transmission’s broken, why cut rates now?(*Linguistic note, the German for a central bank’s main rate is a Leitzins, literally, leading rate. So that led to some verbal punning by ECB executive board member Jörg Asmussen in a speech on Tuesday: “The Leitzins that should be leading, is now only doing so in a limited fashion”. That is top light relief in a central bank speech.)
11.32: Ben Jones, European analyst from the Economist Intelligence Unit has been stroking his chin on the ramifications of Draghi Day:
“It’s been clear for a long time that the euro zone’s bail-out funds are not large enough to fill the financing gap being left by fleeing international investors and that only the ECB could fill this hole. The ECB’s new bond buying programme could prove to be the most powerful weapon deployed so far in the battle to stabilise the euro zone. On the assumption that terms of access can be agreed—and broadly respected—the ECB’s programme should ensure that banks can continue to fund struggling governments in Spain and Italy during the next year or so.
The ECB’s new scheme could also benefit smaller countries, such as Portugal, which has made reasonable progress in implementing its bail-out programme, but which will miss its budget targets nonetheless. ECB support could complement additional direct financing that will be needed, or provide an alternative to it, when the flow of funds from the current bail-out package tails off late next year.
We still however have a number of concerns about the success of the programme. Will the Spanish and Italian governments be able to negotiate terms with the ECB that are politically acceptable and, crucially, be able deliver on them? Can the ECB really buy in sufficient quantities to fill the financing gap, given that the Bundesbank is clearly not on board. By propping up governments in the short-term, will the ECB actually reduce the pressure on governments to take the steps needed to put the euro zone on a more stable long-term footing?”
11.28 A poll in Greece, reported by the English language news website ekathimerini.com says New Dawn, the neo-Nazi party, has overtaken the veteran PASOK socialist party to lie third in polls with 10 per cent support. A reminder of why economic forces matter on the street.
11.15 Reporting on central banks is a tricky task, involving decoding the gnomic utterances of those who devise monetary policy. The FT’s Michael Steen has done a fine job of ferreting out some details of the ECB plan for today’s front page. But with the board members in conclave, he appears to have been reduced to looking to the heavens for omens:
11.12: Amid all the anticipation, we should perhaps remind ourselves of what exactly has gone wrong. We have yet to see a hubris index, so these two charts will suffice. The first shows the extent to which German and French banks have pulled their tentacles out of Europe’s weaker economies. The second one shows the divergence in borrowing costs for eurozone governments (and businesses). That’s the basis for Draghi’s intervention today: that the ECB’s rate signals are getting scrambled by all the panic in the air.
11.08 Those OECD forecasts (see 10.03) in full:
10.51 Further to Michael Steen’s analysis (see 10.35), a Bundesbank board member has weighed in on the central question: whether ECB bond-buying creates moral hazard by letting profligate governments off the hook. Bloomberg reports:
Bundesbank board member Andreas Dombret said that purchases of government bonds by the European Central Bank reduce the incentive for states to reform and shouldn’t become a permanent feature of monetary policy.
“Purchases of government bonds by the Eurosystem reduce pressure on governments of countries that are in the markets’ spotlight to consolidate their budgets and embark on structural reforms,” Dombret said during a speech in Tokyo today, according to a text released on the Bundesbank’s website. Bond purchases should by no means “become the new normal.”
Dombret added that bond purchases by the ECB involve shifting risks from the taxpayers of one state to those of another.
“Such burden-sharing, however, is the task of democratically-elected fiscal policymakers and not of monetary policy,” Dombret said.
For more on moral hazard see this morning’s Short View by FT investment editor James Mackintosh.
10.35 To Frankfurt, where the meeting of the 22 members of ECB’s governing council that is underway on the 36th floor of its downtown headquarters it likely to be a more fraught affair than usual today. Michael Steen, the FT’s man in Frankfurt, reports.
They are discussing the final details of a new bond-buying programme — and their strategy for communicating them to the wider world. Jens Weidmann, the boyish-looking president of the German Bundesbank, has argued long and hard that this is a dangerous route to be taking.
The German central bank fears that a bond-buying programme could lead to a situation in which the bank is effectively financing the state — and that state might then decide to give up on structural reforms and budget cuts. In broader terms what is at stake, from the Bundesbank’s point of view, is the “Bundesbank doctrine” that the ECB was built on: that is, a central bank should focus on price stability (i.e. prevent inflation) and nothing more.
As Draghi made clear after last month’s meeting, Weidmann cuts an isolated figure. All the other central banks appear to be on board. Or are they? There are some indications that, especially among the Benelux countries and Finland, there are still reservations about a bond-buying programme. We’ve heard that these four countries put discussing an exit strategy from any new programme on the agenda for this morning’s meeting.
Take, for example, Klaas Knot, head of the Bundesbank-esque Dutch central bank. He said as recently as July, in reference to a former ECB bond-buying programe: “The buying programme is in deep sleep. That is where it will stay.”
All of this must be making for some fascinating exchanges around the circular meeting room table on the 36th floor. And we’ll get to find out exactly what is being said, just as soon as the minutes are released … 30 years from now.
10.18 Spanish and Italian stocks made strong gains ahead of the ECB announcement, reports Alexandra Stevenson on the FT’s markets desk.
In Spain, where recent data showed Spanish small businesses face the highest bank borrowing costs in almost four years, construction and financial services stocks made the biggest gains.
The Ibex 35 index surged 1.5 per cent to 7,608.4, while Italy’s FTSE MIB gained 1.4 per cent to 15,338.27.
Elsewhere across European markets, momentum picked up mid-morning as investors focused their attention on the ECB in anticipation of any cue from central banker Mario Draghi that it will take strong measures to deal with the eurozone crisis.
“Our view is that Draghi will come through with a credible framework,” Nick Kounis, head of macro research at ABN Amro, said. “He has put his credibility on the line – he has said in very clear terms the ECB would move aggressively.”
Analysts expect Mr Draghi to announce a credible bond buying plan to keep market interest rates of Italy and Spain from soaring.
“If a plan is seriously watered down then you have an ECB institution that has essentially damaged credibility,” Mr Kounis added.
The FTSE Eurofirst 300 rose 0.8 per cent 1,088.73. Germany’s Xetra Dax index rallied 1.4 per cent to 7,062.77, while the French CAC40 gained 1.2 per cent o 3,446.95.
One trader at ETX Capital characterised trading as moderate.
“Most traders staying on the sidelines or squaring positions ahead of the ECB later, even though there was a lot ‘leakage’ in the past few days [about what the ECB plan would look like], nobody wants to take an unnecessary risk just in case the ECB pulls another surprise out of the bag,” he added.
10.12 More from Madrid. Michael Stothard on the FT’s markets desk has the full details of that Spanish debt auction.
Spain sold €3.5bn worth of two to four year bonds at sharply lower yields amid hopes that the European Central Bank will today detail plan to buy distressed eurozone sovereign debt.
The Spanish treasury sold €1.4bn of a four-year bond at an average yield of 4.6 per cent, which is down from nearly 6 per cent at the previous auction last month. The bid to cover ratio was a comfortable 1.9 times.
The €682m worth of shorter dated 2-year debt had an average yield of 2.8 per cent, compared to a yield of 4.7 per cent at the last auction in June. The €1.4bn in three-year debt had a yield of 3.6 per cent, down from over 5 per cent in July.
Before the auction Spanish and Italian bond yields had fallen sharply on hopes that the news from the ECB today would be positive. In early morning trading, Spanish benchmark 10-year bonds were down 14 basis points to 6.22 per cent and Italian 10-years were down 6bp to 5.43 per cent. Spanish 5-year debt was also down 11.4bp to 4.68 per cent.
In the previous session, Germany met weak demand in an auction of 10-year government bonds. The Bundesbank sold €3.6bn of bonds maturing in 2022, with bids amounting to just 1.1 times the amount allotted to investors and falling short of the €5bn target issue volume.
Spain had hoped to raise between €2.5bn and €3.5bn from the bonds.
10.03 In Paris, the OECD, the rich nations’ economic watchdog, has just published its latest assessment of the world economy. Unsurprisingly, it is not suffused with joy. Says chief economist Pier Carlo Padoan:
“Our forecast shows that the economic outlook has weakened significantly since last spring. The slowdown will persist if leaders fail to addressthe main cause of this deterioration, which is the continuing crisis in the euro area.”
10.01 Some MEPs seem to be in danger of putting a little too much faith in Mario the Miraculous.
09.52 BREAKING NEWS Spanish bond auction bodes well:
Spain has sold €3.5bn of bonds. The April 2014 bond’s maximum yield 2.946 per cent vs 4.791 per cent on June 21.
09.43 In London, one trader speaking to Reuters has underscored the extent to which the UK’s economic fate is in thrall to that of its cousin across the Channel.
The BoE meeting should be a bit of a non-event as the ECB dominates attention.
All the same, the UK’s Conservative-led coalition government has this morning to try to put some zip back into the economy with an adrenalin shot of housing and infrastructure projects. The plan is here.
The FT’s Ben Fenton writes:
The formal announcement of the UK government’s plans to boost housing and development has just dropped. A well-flagged relaxation of laws allowing homeowners to build extensions without planning permission is actually quite low on the list of measures.
David Cameron is about to announce the building of up to 70,000 new homes and will offer property developers a pretty free hand in where and how they are built. One intriguing part of the press release No.10 Downing St has just issued says developers will be able to “bypass” local authorities and threatens special measures to “fix” local planning departments that don’t react positively to development.
The government is also formally announcing a big boost in state guarantees to underwrite major infrastructure projects and new housing, a total of £50bn. This was announced in July.
It claims its measures will create 140,000 jobs, mostly in the depressed construction sector. Again, this was pre-announced yesterday.
There will be a new Infrastructure (Financial Assistance) Bill will include guaranteeing the debt of Housing Associations and private sector developers.
“Thousands of big commercial and residential applications to be directed to a major infrastructure fast track and where councils are poor developers can opt to have their decision taken by the Planning Inspectorate,” the release says. Which sounds like a gun pointed at the heads of council officials and councillors.
And the bit that has been dominating headlines this morning, the “extensions revolution”, says: “For a time limited period, slashing planning red tape, including sweeping away the rules and bureaucracy that prevent families and businesses from making improvements to their properties, helping tens of thousands of home owners and companies.”
09.40 Amid mutterings — particularly in German — that the ECB has quietly established itself as Europe’s “secret government”, some in Italy seem pleased that the Mario in Frankfurt (a former Italian central bank governor) is flexing more muscle than the Mario in Rome, namely the technocratic Mr Monti.
09.37 Mario Draghi has not even opened his mouth yet and already he has earned German opprobrium. In a survey for Stern magazine, reported by Reuters, a mere 18 per cent of Germans said they held the ECB chief in high esteem. Almost a third said they had little faith in him and 12 per cent said they had none. Perhaps he can take comfort in relative anonymity. The remaining 40 per cent of German had either no knowledge or no opinion of the man who may hold their economic fate in his hands.
09.20 Alice Ross, the FT’s currency correspondent, is on fire this morning. She’s compiled a round-up of currency analysts’ thoughts ahead of the ECB meeting.
Morgan Stanley: Caution is expected ahead of the ECB meeting, but if Draghi confirms the details of the bond purchases programme as suggested in yesterday’s press reports, then we would expect the EUR recovery trend to be extended. However, any rate cut from the ECB would generate some initial volatility.
The German Finance Minister Schäuble suggesting that he could not recognise a material difference between the monetary policy attitudes of Bundesbank’s Weidmann and ECB President Draghi is another sign that the German Finance Minister stands 100% behind the Draghi plan, in our view.
Credit Suisse: Today’s ECB meeting is a critical event, but as usual, currency markets will need to balance the EUR-positive aspects of any additional stress relief in sovereign markets with the EUR-negative impact of any further monetary policy easing. In general, the best case scenario for the EUR is one in which the ECB drives a further rally in peripheral sovereign bonds without delivering additional monetary accommodation. The worst case scenario for the currency would be policy easing accompanied by renewed deterioration in sovereign markets.
Commerzbank: Over the past few days markets seem to have become increasingly nervous about the expected degree of detail on SMP 2.0 to be provided. In our view the main risk is that Draghi‘s ambiguous comments will give the market the impression that the ECB will be more ‘proactive’ but will not leave it with the required bombshell. Even if the majority of FX market participants expect a risk-on boost for the euro the past has shown that a more expansionary ECB has negative effects for the euro in the end. The rise in inflation risks and peripheral countries tired of reforms will take its toll sooner or later. A considerable share of the ECB activism is likely to be priced in considering EUR-USD levels close to 1.26 anyway. So if we see a temporary EUR-USD upmove this constitutes a good opportunity to sell.
Citigroup: We think that the ECB bond buying program could buy more time for the beleaguered peripheral states to implement further economic reforms. The programme could also protect them from the market turbulence in the aftermath of a potential Grexit. That said, the program need not produce the economic growth and resilience that the periphery so badly needs. More steps towards closer Eurozone integration will be needed to remove the risks of euro break up going forward.
And Citi on whether it will be good or bad for the euro?
The additional information that President Draghi provides in his statement on the volume of the purchases and the usage of bond yield targets will likely determine whether the ECB meeting is a success or disappointment:
1) If the ECB indicate that it will buy unlimited amount of bonds and/or set explicit or internal target levels for (short-term) bond yields, this could be seen as EUR-positive outcome. Also supportive for the single currency will be indications that the ECB intervention will be sizeable enough to cover the funding needs of the respective countries for the next few years. EURUSD could (temporarily) go to 1.2650 and beyond.
2) If President Draghi gives no concrete details on the size of the bond purchases or indicates that these will be of limited size (“adequate”) and temporary in nature to comply with the ECB mandate, this will be seen as a disappointment. EUR could come under significant selling pressure under this outcome.
09.15 Here’s a petit briefing on the Hollande-Cameron meeting from Hugh Carnegy, the FT’s Paris bureau chief. The chat is likely to go well beyond economics.
The first topic of conversation is likely to be the horrible shooting on Thursday of a family of British tourists near Annecy at the foot of the Alps. A man and two women, understood to be a British couple and the mother of one of them, were shot dead in their BMW and a fourth person, a local passing cyclist, also died in the hail of bullets.
An eight-year-old girl, evidently the couple’s daughter, was badly wounded and her four-year-old sister was found unhurt eight hours later hiding under the legs of her dead mother and grandmother.
Hollande will no doubt want to re-assure Mr Cameron that everything is being done to catch the killers. Police have yet to say who they think was responsible, or what was the motive.
Aside from that grim topic, the two will no doubt discuss eurozone issues. In some ways, Hollande’s impatient calls for speedy application of agreements made at the June EU summit for action by the eurozone’s rescue funds and the ECB to hose down overheated Spanish and Italian bond yields echo Cameron’s longstanding calls for the eurozone to wheel out a ‘big bazooka’.
With both France and the UK weighed down by the need to cut their deficits, the two clearly have a shared concern to get European growth moving again swiftly. But they are also likely to spend some time on other worries, notably Syria.
09.10 Alice Ross, the FT’s currencies correspondent, has tweeted on the euro’s movement this morning:
09.00 More on the Riksbank rate cut – from Richard Milne, the FT’s Scandinavian correspondent:
“A surge in the krona and a weakening domestic economy lie behind the somewhat surprising decision from Sweden’s Riksbank to cut interest rates today. Few economists foresaw such a move a few weeks ago. But poor manufacturing and unemployment data in August underlined how Sweden - which recorded some of the strongest growth in Europe in the second quarter – is not immune to the woes of the eurozone. Added on top, the krona was the best-performing major currency over the summer, causing exporters to fret about its impact on profits.”
08.55 Another strong piece of analysis on FT.com today is by the FT’s currencies correspondent, Alice Ross, on the year-long Swiss currency war – namely the Swiss National Bank’s peg to the euro.
Alice writes that a year after the peg was introduced the SMB “faces serious questions over the implications of its policy”.
08.50 And while the UK is not in the eurozone [yet], it’s worth remembering that the Bank of England’s monetary policy committee meets today. Announcement due at midday but the FT’s Claire Jones writes that anyone looking for excitement shouldn’t head over to the Old Lady of Threadneedle Street as no change is expected in either the interest rate or the size of the asset purchase programme.
08.45 Ireland is also in the headlines. Jamie Smyth, the FT’s Dublin correspondent, writes that the International Monetary Fund has urged EU authorities to move ahead with plans to provide Dublin with relief on its €64bn in bank debt to underpin its economic recovery.
“Following an executive board discussion of the 7th review of Ireland’s bailout last night, the IMF said Ireland had met all the targets in its programme and agreed to disburse €920m in aid to Ireland. The fund noted how European leaders’ statement at the June summit, when they said the Union would move to “break the vicious circle between the banks and the sovereign” and consider how to make Ireland’s recovery more sustainable, had helped Dublin return to financial markets in the summer.
‘Timely agreement on such steps, especially ESM investments in the equity of Irish banks, offers real prospects for Ireland to durably exit its reliance on official financing, benefiting Europe as well as Ireland,’ said David Lipton, IMF first deputy managing director.
Dublin is hoping that EU leaders will agree measures in October to enable the ESM to take a slice of its €64bn bank debt off its hands to improve its debt sustainability.”
08.35 Central Bank Action. Sweden’s Riksbank has cut its main borrowing rate from 1.5% to 1.25% amid concerns that the soaring krona is crimping economic growth.
Here’s the top of the Riksbank’s press release:
Growth in the Swedish economy is now slowing down after an unexpectedly strong outcome so far this year. During the summer the krona has appreciated faster than expected and productivity has also been unexpectedly high. Inflationary pressures are therefore expected to be lower than was forecast in July. The Executive Board of the Riksbank has decided to cut the repo rate by 0.25 percentage points, to 1.25 per cent, to prevent inflation from being too low in the coming period. The repo rate is expected to remain at this level until the middle of next year, which will support economic activity and contribute to inflation rising towards the target of 2 per cent.
08.25 Another golden nugget on FT.com is Gavyn Davies’s latest blog post. Gavyn writes that the ECB is adopting the crisis role usually adopted by the IMF. He concludes [don't shout it too loudly]:
“There may at last be some light at the end of this very long tunnel.”
08.10 Mario Draghi is not the only European Big Cheese in the spotlight today. There’s plenty of diplo-activity too.
- German Chancellor Angel Merkel is in Madrid to meet Spanish PM Mariano Rajoy. They’re holding a press conference at 3.30pm London time, although Ms Merkel is speaking at a business conference beforehand.
- The Other Mario – Italian PM Mario Monti, hosts, EU Commission President Jose Manuel Barroso in Rome
- And the cordiality of the entente cordiale will be tested in London, where French President François Hollande is meeting British PM David Cameron.
08.05 Markets update. Jamie Chisholm, the FT’s global markets commentator writes:
Many growth-sensitive assets are seeing mild gains but trading is cautious, with some investors reluctant to take fresh bold positions ahead of the European Central Bank’s decision on how it plans to support the eurozone.
The FTSE All-World equity index is up 0.2 per cent after the Asia-Pacific region advanced 0.3 per cent and as the FTSE Eurofirst 300 opens with a rise of 0.2 per cent.
S&P 500 futures point to Wall Street adding 0.4 per cent later in the day, a positivity that is encouraging mild selling of Treasuries, pushing benchmark 10-year yields up 2 basis points to 1.61 per cent.
The dollar index, often a useful gauge of broad market sentiment – it tends to rise when traders are more fearful – is down 0.1 per cent, while gold is up $10 to $1,703 an ounce, breaking above the $1,700 mark for the first time since March.
07.50 Good morning. Once again, all eyes are on Super Mario. The president of the European Central Bank will today reveal what is arguably the most highest-stakes decision in the history of the institution that oversees the single currency. In July, Mario Draghi 
delighted markets by saying that the ECB stood “ready to do whatever it takes” to preserve the euro. The central bank would not be exceeding its mandate if it intervened in bond markets to ensure its interests rates were properly transmitted, he argued. Since then, some of the pressure on the eurozone’s weakest links has eased. Sovereign bond yields — which indicate borrowing costs and serve as a measure of investors’ opinions of a country’s creditworthiness — have fallen back from their dizzying heights. However yields between the core nations – Germany and France – and the peripheral countries are continuing to diverge. What counts today is the detail. Will the ECB set a maximum yield it will tolerate for eurozone debt? Almost certainly not publicly, and perhaps not even privately, though analysts will no doubt conjecture energetically. Draghi has indicated that only countries that have sought a bailout will benefit from ECB bond-buying. But what happens if said country happily accepts the ECB’s help and then ditches the fiscal conditions of its rescue? Would the ECB walk away, potentially consigning that country to default and a bumpy exit from the euro? As Michael Steen, the FT’s man in Frankfurt, writes in this pre-match analysis:
The only sure thing about the outcome of Thursday’s monthly meeting of the European Central Bank is that every word uttered by Mario Draghi, its president, will be scrutinised for meaning even more forensically than usual.
FT investment editor James Mackintosh, meanwhile, has been probing the central question: how much of the premium peripheral eurozone governments pay in the bond markets is due to genuine concerns about their creditworthiness and how much is down to investors’ nightmares about a break-up of the single currency?
Calculating this premium is tough. The Bank of Italy tried to work out where the spread of Italian 10-year bonds over German should be, with the remainder ascribed to break-up risk. But even then it came up with a range of 122bp to 408bp, depending on which economic and financial indicators it used (it is at 428bp now).
The full Short View is here. At 12.45 London time the ECB will announce whether it has opted to cut interests rates from 0.75 per cent, with a slim majority of economists polled by Reuters predicting no change. Then, at 1.30, Mario takes the floor…
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