I did not get to see his press conference this morning but Bloomberg kindly posted his prepared remarks.

In those remarks there is nothing Hawkish and indeed, some quite Dovish measures so I will need to wait until I get a recording of the press conference to judge the market freak out.

However, here are some key points from the prepared remarks

Based on its regular economic and monetary analyses, the Governing Council decided to lower the key ECB interest rates by 25 basis points, following the 25 basis point decrease on 3 November 2011. Inflation is likely to stay above 2% for several months to come, before declining to below 2%. The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks.

I am a Fed watcher and only a recent ECB watcher but this is hella dovish talk for a Central Banker. Basically, dismissing current inflation reads and using terms like “substantial downside risk”

You are saying that you intend to get in front of the ball and this is only the first step. Strong signal to more cuts and if this were the Fed inter-meeting cuts.

Overall, it is essential for monetary policy to maintain price stability over the medium term, thereby ensuring a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make its contribution towards supporting economic growth and job creation in the euro area.

Restating the mandate. This is meaningless. Everyone must do this.

In its continued efforts to support the liquidity situation of euro area banks, and following the coordinated central bank action on 30 November 2011 to provide liquidity to the global financial system, the Governing Council today also decided to adopt further non-standard measures. These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market. They are expected to support the provision of credit to households and non-financial corporations. In this context, the Governing Council decided:

Almost complete admission that the European Money Markets were shutting down and that this was going to halt the provision of credit.

Given that this is by definition an absolute failure of monetary policy and a complete loss of control, that you put it in the statement is a big deal. It means that you take it so seriously you are willing to admit that you were on the verge of completely losing control of your currency zone.

I am actually not sure I would have done this. I would have said, “the ECB moves to head off any potential disruptions to the euro area money market.” But, maybe communication culture is different.

First, to conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year. The operations will be conducted as fixed rate tender procedures with full allotment. The rate in these operations will be fixed at the average rate of the main refinancing operations over the life of the respective operation. Interest will be paid when the respective operation matures. The first operation will be allotted on 21 December 2011 and will replace the 12-month LTRO announced on 6 October 2011.

Second, to increase collateral availability by reducing the rating threshold for certain asset-backed securities (ABS). In addition to the ABS that are already eligible for Eurosystem operations, ABS having a second best rating of at least “single A” in the Eurosystem harmonised credit scale at issuance, and at all times subsequently, and the underlying assets of which comprise residential mortgages and loans to small and medium- sized enterprises, will be eligible for use as collateral in Eurosystem credit operations. Moreover, national central banks will be allowed, as a temporary solution, to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorising their use. These measures will take effect as soon as the relevant legal acts have been published.

If I am not mistaken this seems to be functionally equivalent to the Fed’s Term Action Facility, only more so. We need to see the actual procedure but 36 months. It means you can dump anything now and not have to worry about it for 36 months.

We need to see what happens if the market value of the collateral declines. Are you required to re-up? If not then for the banking system this is basically a full bailout.

Also, originally I thought the ABS (Asset Backed Securities) language was more vague. Remember, you can make ABS out of anything, and I mean anything. Notes from your grandmother. It doesn’t matter. You just need a model of how payments will flow through to the final security. That means that you can mix good stuff with junk and if overall it gets a single A, you can move the junk onto the Central Banks balance sheet.

However, it seems that it is limited to mortgages and commercial loans. Which doesn’t really matter for our purposes because that is the mass of illiquid assets and the heart of banking.

Third, to reduce the reserve ratio, which is currently 2%, to 1%. This will free up collateral and support money market activity. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system ofreserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions. This measure will take effect as of the maintenance period starting on 18 January 2012.

If I am reading this right, we are saying that we are going to cut the amount of collateral that needs to go to the ECB under Main Refinancing Operation in half. Again, a very big step to reducing the collateral crunch.


Overall my initial read on these statements is extremely dovish. I need to see the conference to understand what in full folks are concerned about. However, this looks like what one would do if you were preparing the Euro banking system to survive a major haircuts on sovereign debt.