Saxo Bank (Saxo Bank)
Markets  |  April 11, 2013 21:15:09

Draghi: Lord of the universe, or a man of flesh and bones?


Nick Beecroft, Chairman, Saxo Capital Markets UK Limited, Saxo Bank .

In a blog I wrote last week, I assure you with confidence that at the press conference after the meeting of the leadership of the European Central Bank (ECB) will see another masterful performance of Mario Draghi. I expected a soothing words and I have lived to see, even if just that this is not. We must recognize that it is good, really true Lord of the universe, to use exaggerated epithet Tom Wolfe. But I have a feeling that I could see in his face minor signs of frustration or even resignation, human side, which showed that they seem to realize that in the arsenal of the ECB's almost no other spells are not, While the euro is only half way to salvation.

As had been expected, the ECB did not reduce interest rates, nor has notified new non-standard measures. Contrary to expectations, but did not reveal any measures specifically aimed against credit fragmentation, which is the current phenomenon where business loans cheaper and more readily available in the core EU countries than on its periphery.

On the other hand, Draghi repeatedly mentioned that the growth is lower than expected, which of course brings its own risks, and inflation is well below what is based on the mandate of the ECB, thus keeping inflation just below two per cent. And so in the foreseeable future is likely to remain. At a later stage the conference Draghi admitted that even in countries that do not suffer from fragmentation credit, growing economic weakness, which was essential. The indication of future monetary actions Draghi has used the Delphi language code as its predecessor. Last week, but it happened so.

Discussion of appropriate measures to address the situation were extensive, but in the meantime, the management agreed to refrain from action. It seems to me that it's pretty clear admission that the decision to reduce tariffs, or use non-standard measures were to happen in the future awaits us probably. But in terms of rates, what else can be done? Reduction in main refinancing rate from 0.75 to 0.5 percent can slightly reduce the rates at which the banks (at least the core) lend among themselves, but the three-month Euribor is already to 0.21 percent. Surprise move could bring into negative territory in terms of deposit rates, but that did not quite fit the ECB and it would probably be the last spell that leaves the ECB in the event that the euro will strengthen too.It makes me feel that the interest rate cut less likely than any other form of quantitative easing (QE), which would, of course, the ECB introduced under a completely different name.

Even at the moment when Draghi told me about his favorite subject fragmentation credit, he looked like a man who is frustrated by not being able to provide assistance. He kept repeating his mantra that the ECB addresses the issue of bank liquidity, and therefore will not defend them to lend money to real people and businesses. He made it very clear that the scheme Funding for Lending (preferential financing banks as willingly lend to businesses and households) in the style of the Bank of England is too big hit. After all, it does work for politicians.

Draghi to the Cyprus crisis too silentBut his view was clear. Painfully described the original proposal, which was hit even insured deposits, as not very smart and comment Jeroen Dijsselbleoma (Cyprus could be a model for other countries) called for the misunderstanding. He stressed that the Cyprus experience underscores the need for rapid completion of the European Union and the Bank eventually repeatedly called on the government to give their finances in order, and made it clear that there are limits to what the ECB can do, and that line is very close!

Extraordinary meeting of the Bank of Japan

Quite the opposite of ordinary ECB meeting on Thursday was an extraordinary meeting of the Bank of Japan. The announced measures like breaking out of Mugabe's manual about monetary policy and we should all wish that it will not be too successful. Japan, spol. s roobviously hopes that the market will continue to focus on the effect on the price of Japanese government bonds has its acquisitions by Japanese banks, instead of what may constitute a potential danger spirited inflation.

Interest payments on debt already represent more than a quarter of government spending, although the interest rate is 0.5 percent and at shorter maturities and lower. This situation I am always nervous. How to tell? Everything will be great to manage until it goes wrong. As we move forward inflation expectations and rates start to rise, the Bank of Japan will probably have to buy up more and more Japanese government bonds. There are other seemingly sustainable models? A few of them are: the U.S. housing market never goes down nationwide, Internet has created a new paradigm, one has to dance while playing music. Great idea, until not gonna screw.

Maybe the Lord of the universe expects his work for him does the Bank of Japan.

Post Draghi: Lord of the universe, or a man of flesh and bones? comes from Saxo Bank 24/7

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