FRANKFURT (MNI) – The exit from non-conventional policy measures
has moved back into focus amid ongoing signs of economic and financial
market recovery, the latest comments from European Central Bank
Governing Council members confirm.

Council member Yves Mersch welcomed Greece’s recent sale of
short-term debt to investors as a sign of increasing normality that
could allow the ECB to end its government bond buying program.

“What some people considered was not possible is possible. They
were able to borrow at rates which are encouraging,” Mersch said in an
interview with the Wall Street Journal, referring to Athens’ sale
Tuesday of E1.625 billion in six-month Treasury bills at an average
yield of 4.65%.

“All in all these are signals that we will monitor and take into
account when we discuss this temporary, non-standard measures in the
future,” Mersch said.

Recent comments from the Eurotower, including from President
Jean-Claude Trichet, also have suggested that the central bank may slow
or even halt the controversial government bond buys.

While not offering details on specific non-standard measures,
Council member Mario Draghi said Thursday that once the recovery is
confirmed, “it will be necessary to resume the gradual exit from
non-conventional monetary measures.”

“Even with the pause of the past week, following the renewed strong
tensions that originated in the market for Greek public securities, this
process has been underway since the end of 2009,” he said.

Mersch, on the other hand, did not appear to need much confirmation
of the recovery. “We totally rule out any double dip or renewed
recession setting in,” he asserted.

Mersch and Draghi are only the latest ECB policymakers to sound
increasingly optimistic even as many outside observers, including the
International Monetary Fund, remain far more sceptical.

The big test showing whether the new optimism is warranted will be
the July 23 release of results from bank stress tests of 91 European
banks.

Latest data from the Bank of Spain can only have compounded worries
ahead of next Friday. The figures show that Spanish banks stepped up ECB
borrowing by 48% to E126.3bn in June, from E85.62bn in May, even as
overall ECB lending declined.

Draghi urged “maximum transparency in the communication” of
European bank stress test results and readiness to fill any
capitalization gaps immediately.

“On that date, European governments must be prepared to intervene
with the appropriate measures, wherever the results show capital
weakness and market solutions are not available,” Draghi said.

Only a quick recapitalization of banks, to remove lingering
solvency fears, will allow the ECB to press ahead with its exit from
non-conventional policies.

—

July 12, 2010:

FRANKFURT (MNI) – The European Central Bank’s government bond
buying programme is winding down, suggesting that the end of
controversial market intervention is near.

On Monday, the central bank said it had bought only E1 billion in
bonds last week after E4 billion in each of the previous three weeks and
as much as E16.5 billion in mid-May at the height of the sovereign debt
crisis.

If the situation improves further, then there is no need to
continue, ECB Executive Board member Juergen Stark said Friday. Fellow
board member Lorenzo Bini Smaghi observed that “we have seen some
results. Markets are slowly improving.”

President Jean-Claude Trichet made note of the declining volumes at
his press conference last Thursday, hinting that the apparent “trend”
would be confirmed by the latest figures. “We are not surprised that the
market is a little bit better,” he said. “But we remain alert.”

The International Monetary Fund, however, warned last week against
a precipitous unwinding of support to the secondary market, observing
that “markets are not yet convinced of the central bank’s commitment to
scaling up purchases if necessary to prevent a further deterioration in
market functioning.”

There appears to be no common position yet at the ECB on the
possibility of transferring the buying program and the bonds purchased
so far to the European Financial Stability Facility once it is in place.
Asked about this option, Trichet said he would “call for flexibility in
the utilization of the fund.”

Stark, by contrast, reminded that “the ESFS has been set up for
only three years to provide loans to countries that can not access
markets. Its mandate is very clear.” Some of the bonds bought by the ECB
have longer maturities than three years.

Stark, who had made clear his concern that the bond program was too
close to the ultimate taboo of monetizing fiscal debt, may fear that a
transfer of responsibility to the ESFS could be a first step towards a
permanent bailout mechanism and a fiscal transfer union through the back
door.

Not only does the ECB appear opposed the IMF’s advice on bond
purchases, but it also rejects the Fund’s assessment of the Eurozone
economy as too pessimistic.

“I see perhaps a tendency, not on our part – because we remain
very cautious and very prudent – but outside the euro area, to be first
excessively pessimistic about us, and to see that the figures we have do
not confirm this pessimism,” Trichet said Thursday.

Stark was more direct. “We see a bias that the IMF has not caught
up to the reality in Europe,” he said. “The IMF is underestimating the
strength of the recovery in Europe.”

As the ECB is trying to talk up confidence and is banking on stress
tests to assuage solvency concerns, which would allow to reduce its
liquidity supports as well, it will certainly not have welcomed the
IMF’s warning that a euro area banking crisis could stall the global
recovery.

Far from projecting new turmoil, monetary policy-makers have
expressed optimism that stress tests will bolster the confidence of
investors and savers.

Both assessments seem premature ahead of the release of the bank
stress tests results on July 23. EU finance ministers are meeting this
week in Brussels to determine further details of the tests.

The impact of the results for the Eurozone’s financial system and
overall economic sentiment will largely depend on the credibility of the
stress tests, the scenarios tested, the details to be released and
mechanisms set up to bridge any recapitalization needs.

–Frankfurt newsroom +49 69 72 01 42; e-mail:jtreeck@marketnews.com

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