Monday, September 3, 2012

Analysts Predictions ECB Meeting sept 6 2012

Analysts Predictions ECB Meeting sept 6 2012 : The countdown has begun for Thursday's European Central Bank meeting, with particular focus on whether, when, and how President Mario Draghi will follow through on the promise he made last month to support Italian and Spanish bonds.

We know, from what Mr. Draghi said at August's monthly press conference, that bond buying will focus on short-term debt, and that it would be contingent on the countries involved entering into a monitored program of cost-cutting.

The rest is guesswork: will the ECB impose explicit, fixed limits on yields, or floating, implicit targets? Will it take senior status on any of its bond purchases, shoving private investors down the chain--a move that would likely deter any would-be buyers?

Will it announce any details at all this week? It's a tough ask, especially as the European Stability Mechanism--Europe's permanent rescue fund that is expected to be involved in bond buys--has yet to be ratified by courts in Germany and elsewhere.

Here is a rundown of what analysts and economists at some large banks believe the ECB is set to do next September 6 2012

We expect Draghi will be light on specifics, but post-meeting action to lower two- to three-year sovereign yields in Portugal will speak louder than his words. The case for the ECB to intervene in Portugal is very strong, given the country's adherence to austerity programs. The absence of intervention in Portugal after the meeting would suggest one of two things. First, that the ECB's rhetoric on repairing monetary transmission is merely a convenient fig leaf for the provision of support to sovereigns too large to be accommodated by the EFSF/ESM. Or second, it would suggest that it views Portuguese rates as high solely because of the risk of a debt restructuring.

Purchases will be unlimited only in the short run. Yield objectives will be implicit and flexible, and buying will be restricted to sovereign debt only. Building trust on seniority will take time.

Our best guess is that the ECB will sterilize its purchases by offering one-week bills, as under the previous bond-buying program.

RBS: We think that the ECB is unlikely to announce an explicit target but any effective intervention must have some concept of a yield cap anyway - just that the ECB will not likely be bound to strict caps. Most likely, the ECB will keep the markets guessing for some time.

To allay concerns over ECB seniority, the central bank may commit to taking a loss in the event of another Greek restructuring. This is unlikely to wash with the markets as no legal contract on the bonds is possible and it's less credible with large countries involved, but it is an improvement on previous situation.

BARCLAYS: The ECB is independent, so we do not think it will wait until the German constitutional court decision on Sept. 12 to give full details of its actions.

In our view it would be more effective if the EFSF/ESM has a defined fixed size but the ECB interventions are kept open and flexible. An explicit cap on, say, short-end bond yields (say 3% max on three-year bonds) would have to be defined, communicated and justified by the ECB, and might act as a specific 'target' for investors and market makers. It would likely be tested, and the ECB would have to be committed to defending it. An implicit cap would be similar, but it does not need to be justified and defended in the same way.

DEUTSCHE BANK : Our base case is for the ECB to flesh out a bond-buying program with the following features: (a) extend beyond bills to the two-year to three-year sector, (b) have an implicit and flexible quantity target (c) not sterilize the purchases initially, and (d) link the program to either the EFSF/ESM primary intervention or to the quarterly reviews likely to be agreed in the memorandum of understanding. The seniority issue is unlikely to be convincingly addressed at this stage, although there are a couple of alternatives that could make the ECB's pledge more credible.

The ECB is said to await the German constitutional court ruling on the ESM on Sept. 12 before it finalises its bond plan. That means we probably won't get all details at the Sept. 6 ECB meeting. We continue to stress that such a yield target, even if flexible, is too far from the ECB's mandate to be credible. It may also be seen as a threat to its independence.

ING STAN.LN : Our baseline view is that potential ECB buying of government bonds would be concentrated on short-term Spanish bonds. The hope then would be that it would have a positive anchor effect right across different maturities, and also helps Italian yields to come under downward pressure from a relative value perspective. Yield or spread caps are not going to happen in our opinion, but a promise to provide some serious support will likely happen. As the ECB would be buying on behalf of EFSF/ESM the thorny seniority issue could be sidestepped.

CITIGROUP : While we don't expect the ECB to announce an intervention target or yield cap or size of commitment, we do expect them to restrict their focus to short-term debt (which we think will mean bills up to two years). This is in order to keep reform pressure high and also because t-bills are usually not included in any government debt restructuring. There is a significant probability that activation of the ECB bond buying program won't be until the latter part of September given the need for a German Constitutional Court ruling and the need for a formal request for financial assistance by a member state. Although we expect a request from Spain, this request may come less soon than anticipated in some quarters.

We do not think the Governing Council is ready to put a finished detailed proposal on the table. The Council may want to retain some flexibility. It will need to give enough flesh to the bond-buying program to enable the Spanish and Italian governments to evaluate their options, but not so much as to tie its own hands prior to knowing the broad contours of the requests that will be forthcoming. In addition, the Council will not want to be seen as pre-empting the German Constitutional Court ruling on Sept. 12.

COMMERZBANK : We expect the ECB to take a more pragmatic approach, buying shorter-dated bonds in unlimited sizes after reaching certain spread levels. A better appraisal of the ECB's reaction function will only be possible after the program has been activated for some time. The exact quantification of the band should not be revealed as it is in the ECB's interest to maintain flexibility. The implicit band the ECB will be targeting should also vary over time and according to maturity and country.

UNICREDIT : The ECB cannot announce an additional target of any sort because two targets could come into conflict with one another at some future date. Also, an explicit cap on a country's borrowing costs would imply--at least in theory--a possibility of the ECB buying everything, including the existing stock of debt, opening it up to a host of unpleasant issues, from monetarization of debt, to preferential treatment of one member state, to speculative attacks. It won't happen. Rather, Draghi will be vague - and he should be.

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