*Blog migrated (prefer medium to wordpress): originally published on July 16th 2015 here (tweet).

A few (rough, preliminary) questions for Draghi today [July 16th 2015*]

Preliminary because the events of this morning and the press conference statement will throw up many, many more.

Greek crisis related

(1) Perhaps we could revisit your “whatever it takes” line from 2012 in the context of Benoît Cœuré’s comment on June 30th that Greek exit from the Eurozone “could no longer be excluded”. Many analysts viewed this as a significant U-turn from their interpretation of the Executive Board’s position up to that point — a position of defiant irreversibility of the euro. Were they wrong in their interpretation up to that point?

Do we now know that doing “whatever it takes” to preserve the euro is not the same as same doing “whatever it takes” to keep Greece in the euro? And by implication retaining the current composition of Eurozone member states? Should that not worry markets and citizens of periphery Eurozone member states?

[Added 13:00 BST] Besides, wasn’t “whatever it takes” only ever accepted in the market because of political validation from Berlin and Paris, as Mervyn King recently argued?

(2) Quoting from the ECB’s recently issued Financial Risk Management of Eurosystem Monetary Policy Operations paper:

According to Paragraph 62(b) of the Banking Communication, ELA may contrite state aid if it is not “fully secured by collateral which appropriate haircuts are applied, in function of its quality and market value”

And indeed your comment at the last press conference:

We assess how developments in the markets affect the quality of our collateral [against ELA loans]..

It’s difficult to reconcile these remarks with how the ECB have applied haircut adjustments to Greek bank collateral over recent months. Despite a significant deterioration in the market-implied value of Greek bank’s ELA collateral (that was declared in Q1 results, end-May) there was no reported haircut adjustment until the June 28th decision.

Why was it only at that point an adjustment was made? Surely a more frequent increase to the haircut value should have been made in the preceding weeks to account for the diminishing market value (if indeed collateral assessment was based on the credit technicals).

According to reports the haircut adjustment was made on government-backed debt collateral only (hiked up to 45%). What of non-government backed collateral — especially in the following weeks? Credit controls will have triggered a significant deterioration in the quality of Greek bank’s loan book (as limits further restrict creditors ability to pay, a chunk of loans will have passed 90 days overdue — and become ineligible to pledge for ELA). And yet no haircut adjustment?

Can you please explain the process by which collateral quality for ELA purposes is assessed in a bit more detail.

(3) Two headlines hit the Bloomberg wire immediately after the press release of the June 28th ELA decision:

*ECB SAID TO SEE EXISTING GREEK ELA INADEQUATE FOR BANKS’ NEEDS
*ECB SAID TO VIEW BANK HOLIDAY FOR GREECE AS NECESSARY

Why were they not included in the original press release?

(4) How close have you followed the SSM’s monitoring of Greek banks the last two week? I want to understand how the system has remained functional (i.e. with a liquidity buffer above zero), despite several “false calls” over the period from the Greek Banking Association that banks would run out of cash within days without an increase in the ELA cap. Have payments into the system been higher than expected? Have interbank loans played a part?

Governor Nowotny said on July 8th “there are means to stretch Greek Bank liquidity” [without an ELA cap increase] — what did he mean by that?

(5) Just wanted to confirm the ECB will not accept an “IOU” in lieu of a cash coupon payment from Greece on July 20th? It was suggested as an alternative to EFSM bridge-financing only yesterday by the German Finance Ministry. It not, would you suggest the Bundesbank be more active in educating the Ministry about ECB rules?

(6) It was mentioned by the EC on Tuesday that the EFSM bridge-financing may be part collateralised by BoG’s SMP profits, currently held by the ECB.

Usually when a counterparty makes a payment to a creditor backed by the creditor’s own collateral alarm bells start ringing. Do you see any problems?

(7) On Tuesday Prime Minister Tsipras said ECB will “mobilize itself” to increase the ELA after negotiations for the third programme start. He said lifting of capital controls will be “gradual”. Is this something you envisage — a gradual lifting of the ELA cap?

(8) There remains significant confusion about the ECB’s stated “front loading” of PSPP. It was confirmed in the recently published monthly PSPP data that — on aggregate — the volume purchased by the ECB in June was less than in May — in stark contrast to Benoît Cœuré’s (controversial) London remarks.

And since the end of June, over the last two settlement periods, the purchased quantities have been less than the overall programme average, suggesting the ECB has not ramped up PSPP in response to the escalation of the Greek crisis. Which is interesting as it means periphery yields have remained stable by the power of the ECB’s words alone?

Over recent weeks we have seen a decorrelation between sovereign periphery cash yields (falling) and CDS (rising) — which suggests both perception of risk and expectation of ECB activism increasing.

(9) Ben Friedman recently asked how central banks can make an “independent assessment” of bank solvency without taking their own actions into account.

Can you reflect on this comment in the context of the SSM’s “comprehensive assessment” of Greek banks to take place after summer (per Greek creditor agreement).

(10) On July 7th Governor Rimsevics told Latvian radio that Greece has “voted itself out” of the Eurozone (Reuters).

On July 6th Governor Nowotny said the chances of reaching an accord with Greece are “not good” (Bloomberg).

— is it a concern to you when members of the Governing Council make such overtly political statements? Does it suggest the relationship between some National Central Banks and their Treasuries has got a little too cosy for full independence in recent weeks?

It was also interesting on July 9th that Wolfgang Schäuble was the keynote at a Bundesbank organised research conference. Is it appropriate that a politician speaks at research conference organized by a Eurosystem bank? Can’t recall ever having seen a politician on the programme of a Federal Reserve or Bank of England organised research conference. Yet it seems to happen all the time in the Eurosystem. Does this risk undermining the spirit of independence?

(11) Paul De Grauwe has argued that because the ECB hasn’t activated OMT in current Greek crisis, nobody believes they will activate it in any future crisis. Seems like a convincing argument?

(12) Larry Summers said on the June 29th “Draghi is the only person to have acquitted himself on Greece”. Had you then? If not, have you now?

(13) Hypothetical question: To what extent would a common European deposit insurance scheme (that we saw renewed vigor from the EC to push only this week) have stemmed Greek bank outflows over recent months? To what extent would it have averted the ECB getting dragged so deep into politics of the crisis? Presumably you will push hard to get this delivered as soon as possible?

Not-directly Greek crisis related

(14) Question regarding the decision to expand the list of PSPP eligible agency debt on July 2nd to include public non-financial corporates (NFC).

Is there not a stark conflict of interest that on the one hand ECB advocates structural reform to combat natural state monopolies — of which many of the companies included on the list are — while on the other buys their debt under PSPP?

Also, stipulated in the original PSPP legal document was a precondition for buying NFC bonds: “substitutes in the case the envisaged amount to be purchased in marketable debt instruments issued by central governments or recognized agencies in their jurisdiction cannot be attained”. Does that mean the BdE and BoI are struggling to find sufficient volume of Spanish, Italian government debt to buy, for example?

(15) Last year ASBPP was pitched as the great savior that would revive SME lending through an explosion in SME backed ABS issuance. Yet that hasn’t happened — infact H1 ABSPP eligible issuance is down sharply versus last year. Interestingly, Peter Praet said on June 30th that “ABSPP is seen as providing the asset class with a credibility boost..” Has the only achievement of ABSPP been good PR for the asset class?

(16) Noted in the July BLS published on Tuesday that only 4% of banks intend to use future TLTROs to contribute to the purchase of sovereign bonds, versus 22% for past TLTROs.

Is it a concern so many banks have used past TLTROs to make a quick buck through carry trade? And indeed reinforce the sovereign-bank nexus.

(17) Is the significant slowdown in primary euro debt capital market issuance (due to market uncertainty) since the Greek crisis escalated something to be concerned about, from a stability perspective? And if not now, over what time horizon does it become a concern when banks cannot tap syndicated debt capital markets?

(18) Question on the Five Presidents Report. Some analysts argue that now Greek exit has been averted, risk of British exit is Europe’s “next big thing”. Is there not a danger Europe floats from averting one crisis to the next — attention distracted, resources diverted from the urgent institutional reform outlined in the Five Presidents Report?

Coeuré said at the end of June if Greek exit was to occur, Europe must “meet as soon as possible” and “seriously strengthen its institutional framework”. Can Europe only be forged in crisis?

(19)

We must not allow excessive fluctuations in financial market to threaten the achievements of our objectives, which is to ensure price stability in the medium term.

How “excessive” must fluctuations become — and within which asset classes — before it threatens said achievements?

(20) An audience survey question from the ECB Forum in Sintra:

How did you vote and what are the implications for ECB monetary policy over the medium term?

(21) Congratulations on the new website! When is the Statistical Data Warehouse due an upgrade?