Lagarde channels Draghi and re-commits ECB to periphery support…
The ECB has kept its asset purchase program unchanged, but has tweaked its Long Term Refinancing Operations to make them more appealing to banks while also announcing a new facility, the Pandemic Long Term Refinancing Operations.
In terms of both policy substance and communication, today’s performance from Christine Lagarde is by far the best of her tenure at the head of the ECB. The ECB President has managed to restore some of the constructive ambiguity around support for sovereign bonds that Mario Draghi carefully cultivated.
The absence of an expansion in asset purchases is not hugely significant when the tweaks to LTROs and the addition of PELTROs are considered. During the press conference, Lagarde promised to make full use of the flexibility embedded in the PEPP – another nod to purchases of Italian and periphery debt, which represented an outsized chunk of the initial asset purchases.
The crux of today’s press conference was the segment of the opening statement where Lagarde said the ECB would ensure policy is transmitted to all jurisdictions – something that would be impossible if Italian sovereign yields began to rise uncontrollably, for example. Her added commitment to increase asset purchases “by as much as necessary” was a nice re-wording of her predecessor’s now immortal commitment to do “whatever it takes”. Language matters a lot when it comes to central bank communication in a crisis. Lagarde made a clear choice to reverse her previous, disastrous error in March’s press conference, where she seemed to hesitate when asked about Italian sovereign yields.
On the whole, Lagarde has improved her communication greatly and is clearly bidding to restore some of Draghi’s “whatever it takes” magic, which went a long way to supporting the functioning of eurozone markets.
She was similarly careful to emphasize that OMTs remain an option when pressed during the Q&A. In terms of policy substance, the ECB’s revised and expanded LTRO portfolio does appear to be a credible backstop for liquidity in eurozone money markets, although only time will tell if it will prove sufficient should another serious panic of the sort seen in March develop.
Bund-BTP spreads have paradoxically widened on the day, but this price action is not likely to hold up, in our view. The details of the PELTROs will be a key peice of new information – if banks are able to use this lending to then purchase other assets, such as sovereign bonds, the facilities may be another channel by which the ECB can support eurozone money markets.
Author: Ranko Berich, Head of Market Analysis