GIORNALE3

Viewpoint: the ECB believes “the ball is now in the governments’

ECB – Mr. Draghi’s press conference supported our view that the ECB is waiting to assess market developments. After the “undisputable success” of the 36-month repos, the ECB believes “the ball is now in the governments’, and…


For professional investors and advisers only


especially in the other actors’, court”. In our view it is unlikely that the Bank could announce new non-standard measures in coming months. The ECB reasserted that the SMP is neither eternal nor without end, but did not indicate that it will be shelved any time soon. New macroeconomic forecasts are consistent with rates remaining at 1% for a long time. Greece – the positive outcome of the debt exchange does not solve the Greek crisis, but at least makes Greece a smaller risk factor for the future of the Eurozone.

– Mr. Draghi’s press conference supported our view that the ECB will now pause at length to assess the effects of the two three-year auctions. The ECB kept open all its options, but the rhetoric used by Draghi suggests that, barring extraordinary events, no new non-conventional measures will be announced in the months ahead. However, it should be stressed that the ECB will continue to satisfy demand for liquidity unlimitedly with its ordinary auctions until July (and, in our view, for the remainder of 2012). Rules on collateral will, where necessary, be potentially slackened further. Also, despite the  inactivity seen over the past three weeks, the SMP still hasn’t officially been declared closed, and may be reactivated if needed. At the same time, the improved macro picture and the new ECB staff estimates (see table) are consistent with rates remaining at 1.0%.

–  As regards the extraordinary operations, Draghi considers them an “undisputable success”, as they have removed tail risks, guaranteed ample liquidity to the banking system, and lifted refinancing risk for banks and, indirectly, for governments. As regards the impact on credit, Draghi observes that the second 36-month auction saw the participation of 800 credit institutions (of which 460 German), as opposed to 500 participants in the first. The hope is that the increase in the number of banks, probably of small size, may make the liquidity supplied more accessible to small and medium enterprises (particularly  affected by stricter credit conditions as bank loans are their main source of financing). Having said this, it will take time to assess the effects, probably not so clear, of the operations. The ECB believes that in
the wake of the marked improvement in market conditions and sentiment triggered by the operations, “the ball is now in the governments’, and especially in the other actors’, court to continue their reforms and repair their balance sheets”. The ECB is responsible for the liquidity of banks and acts as a lender of last resort for the banking system, but cannot, and is not called to, bear the burden of the balance sheet recapitalisation of banks.

–  No potential tightening of rules on collateral was discussed; in fact, as specified by Draghi, the rules may be further slackened if necessary. However, this does not seem to be on the cards for now, as only 53 billion euros in credits were issued under the new rules, of which 40 billion by French banks, already over-collateralised. Additional credit for what concerns Italian banks apparently amounted to only three billion euros.

–  Draghi stressed that concerns over the riskiness of the ECB balance sheet lack serious grounds, as they are not assessable in terms of assets as a percentage of GDP, but rather in terms of capital (currency and gold reserves), which is very substantial in the case of the Eurosystem (ECB and National Central Banks),  and certainly larger than the FED’s and the BoE’s. As regards the criticism made by the Bundesbank, according to press rumours, Draghi said he is in full agreement with the President of the Bundesbank on the need to respect the traditions and culture of the German central bank, and reminded that the decision on LTROs was taken unanimously.

–  According to Draghi, the balance of risks has improved significantly. He is confident that the “new fiscal compact” signed last week represents a pillar to guarantee  the consolidation of confidence, and declined to comment the Spanish Government’s decision to revise its 2012 Budget target shortly after the reaching of the agreement.  

–  As regards interest rates, we expect them to stay put at 1.0% for an extended period of time (at least until the first half of 2013), barring further negative developments in terms of the macro picture. ECB staff growth forecasts have been revised downwards on both 2012 and 2013, compared to December. On the inflation front, the ECB has raised the forecast range, more so in 2012 than in 2013. The central forecast sets inflation as 2.4% in 2012, and down to 1.5% in 2013. The upward revision of inflation estimates is mostly due to higher oil prices and to a weaker exchange rate compared to  last December. The underlying assumptions are for a price of oil of 115 dollars per barrel in 2012, down to 110 in 2013, with an exchange rate of 1.31 in 2012 and 1.32 in 2013.  

–  In its assessment of risks, the ECB believes  uncertainty over the growth scenario, and downside risks, have eased. Reduced downside risks to growth are the result of improved risk conditions, low interest rates, and resilient domestic demand.  Risks to the consumer price trend in the short term are skewed to the upside, due to lingering pressures from energy prices, to higher direct taxes and rising administered prices, although in the medium term risks to the consumer price trend remain compatible with the price stability target.  Significant economic slack, and in particular labour market conditions, suggest that domestic pressures on wages, costs and prices will stay modest in the medium term.

09032012_1

–  Greece – The good outcome of the debt exchange paves the way to the launch of a second support programme, which should be finalized next Monday by the Eurogroup. With the activation of the CACs, all the debt issued under the local law (177Bn euros) will be restructured, to which we have to add at least 20Bn of debt falling under other legislations. Juncker has already told the press that the preconditions set for the programme have been met. The size of the IMF contribution will probably be set later, on March 15, but some indication will be given to the Eurogroup before it convenes next Monday. Of course, this does not solve the Greek crisis and does not mean that the next reviews will be smooth. However, now the Greek crisis is a problem that has to be managed by a small number of players with high stakes (the Eurogroup, the ECB, the IMF and Greece itself) and the likely deviations from the best case scenario of fiscal consolidation will be dealt with more easily by rescheduling the repayment of official loans.


Appendix

Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld – Intesa Sanpaolo – Research Department