ECB Q&A March 2008

Transcript of the questions asked and the answers given by Jean-Claude Trichet, President of the ECB, and Lucas Papademos, Vice-President of the ECB

Silvia Wadwha CNBC

Question: First of all, a bit of housekeeping: were other options discussed apart from the 50 basis point cut?

Secondly, on the issue of quantitative easing, there has been a lot of discussion about quantitative easing not only with the ECB, of course, but with the ECB sparked by remarks by Axel Weber and Christian Noyer referring to commercial paper programmes, and that the ECB could embark on buying commercial papers. Was that discussed, has that been an issue?

And in that context, thirdly, with that, how concerned are you at the ECB that the ECB’s balance sheet is getting longer and longer and, in fact, there has been a great deal of quantitative easing already?

Trichet: On your first question, we had, as always, an in-depth discussion on the present situation, on all the observations, which were made, on all figures, on staff projections and on the appropriate policy decision in the present circumstances. After this thorough discussion we concluded by a consensus on the decision which we took. I have just mentioned what we did as regards interest rates. I emphasise the fact that we decided to diminish our main refinancing operation rate by 50 basis points. We also decided not to change the width of the corridor, which is, between the deposit facility and the main refinancing rate, a full percentage point. So, we decided today to put our deposit facility at the level of 0.50%, which is very, very low. This decision to put our deposit facility at that level - taking into account the fact that the unlimited supply of liquidity is deriving the overnight rate quite close to the deposit facility - is of great importance. We also decided today, which will be elaborated in a press release that you will have immediately after this press conference, to continue the fixed rate tender procedure with full allotment for all main refinancing operations, special-term refinancing operations and supplementary and regular longer-term refinancing operations for as long as needed and in any case beyond the end of 2009. And we have decided to continue with the current frequency and maturity profile of the supplementary longer-term refinancing operations and special-term refinancing operations for as long as needed and in any case beyond the end of 2009. These are the decisions which we have taken today.

As regards your second question on quantitative easing or non-standard measures – this would be the way I would describe these measures – as you have underlined yourself, we are already using non-standard measures. I think you were absolutely right to say that. With the very substantial enlargement of the eligibility of our collateral, and that in combination with the supply of liquidity on an unlimited basis which has been decided by the Governing Council, we are using non-standard measures, which have had important consequences. I mentioned one of the consequences as regards the positioning of the EONIA rate. Another consequence is that our own balance sheet has augmented substantially, and, if you wish to have an order of magnitude we have an augmentation of the risk that we are taking ourselves in our own balance sheet since the start of the turbulences in August 2007, which is of the order of magnitude of 600 billion euro, of the order of magnitude of 800 billion dollars. This represents a little bit more than 6% of the GDP of the euro area, so this is substantial. As regards further non-standard measures, on top of the two measures I have mentioned, on top of what we have decided today – to say that we would continue as long as needed and beyond the end of the year – we are discussing and studying possible new non-standard measures. I will not elaborate on that; we had absolutely no pre-commitment to any particular non-standard measure. I don’t exclude anything. I will give you a rendezvous when, if and when, we decide. Then I would be happy to explain what we have decided. Again, we are studying possible additional non-standard measures.

Bloomberg News: With the main refinancing rate at 1.5% do you think you are getting close to the limit? Last time you said you considered 0% rates inappropriate. Do you still think so?

And my second question would be relating to potential non-conventional measures you may embark on in the future. Some of the non-conventional measures used by other central banks very much depend on the cooperation and indemnity of their treasuries, like the Bank of England or the Fed depend on their finance ministries to provide indemnity for any sort of default on commercial papers or anything else. So in the absence of a single European treasury, have you started discussions or pushed for discussions with various finance ministers or at the Eurogroup level to come to some sort of conclusion? I believe Mr Juncker was at the meeting today, was that raised at any level? Or was it raised at some sort of seminar or anything else?

Trichet: As regards your first question, I confirm what I have already said: we see a number of drawbacks associated with a zero rate level. As regards the present level of the main refinancing operations, we did not decide ex-ante that this was the lowest point that we could attain. Further decisions will depend on facts, figures and judgement of the Governing Council.

As regards your second question on the non-standard measures, there is no pre-commitment for any kind of non-standard measure. I exclude nothing. It would be the decision of the Governing Council and we are looking at it. At this stage there has been no discussion with executive branches as regards any help or any guarantees or any support that could be given. And it is not an avenue which fits necessarily correctly with our own framework. We did not ask for any kind of help when we engaged in this very important consequence of the non-standard measures, namely the increase in the size of our overall balance sheet. That being said, if we exclude nothing, there is nothing that would substantiate such an avenue at this stage.

Joellen Perry WSJ: I have a couple of questions. You have just said you are studying the implementation of non-standard measures. Does that mean you are studying the process by which you might implement them or you are studying the need for them?

Secondly, I’m not an economist and maybe I’m a little bit confused. You say in the statement “after today’s decision we expect price stability to be maintained over the medium term”. If I did the maths right, in 2010 the mid-point is 1% and both 0.6 and 1.4 are well below your definition of price stability, so what am I missing?

And my last question, you also said today’s decision was a consensual decision – could you give us a little bit more detail on that, what were the other options discussed?

Trichet: On the non-standard measures, we are discussing of course both the need and the process. And any decision would suppose that we see the need and that we agree on the process.

On price stability, we have the staff projections – although we do not ourselves underwrite the staff projections, they are the judgement of the staff. Let me mention just one point among many others: the present methodology is based upon existing market interest rates, the observation of the yield curve and the evolution of market interest rates. It is part of a methodology that is very much an agreed methodology, generally considered to be state of the art. Before the methodology just mentioned, we had another methodology which used the working assumption that you take the interest rates where they are and they do not change: Interest rate policy was unchanged in the previous methodology. According to various models of the euro area economy if our staff would still use the previous methodology, the projections would display substantially more growth and significantly more inflation in the euro area economy. And if I take the level of interest rates that we have decided today – not the interest rates which existed at the moment of the projections – then the impact would be even higher in terms of growth and inflation. Our decision today takes into account precisely the fact that we are not passive ourselves, and we use all information available to make our judgments. So we trust, as I said on behalf of the Governing Council, that with today’s decision we are ensuring price stability over the medium term.

Regarding your third question, I will confirm that there was a consensus, after a very in-depth discussion as we are in a very multi-dimensional, complex and uncertain world.

Ralph Atkins Financial Times: I am sure markets are going to price in further cuts in the ECB interest rates in the coming months. Would you want to say anything to discourage them, or does your statement that you put in today saying that after today’s decision we expect price stability to be maintained over the medium term mean that, if events unfold as set out in your base line scenario, there would be no need for any further interest rate cuts?

And, secondly, there are a lot of issues around at the moment, but, just to focus on one or two: if we talked about classic quantitative easing in the true sense of the form that the Bank of England has announced today, would you imagine such a programme being either effective or practical in the context of the eurozone? I am not asking if you are going to do it, but given that economists seem to argue that quantitative easing does work do you think they are correct?

And third, if I might just ask you to comment on the situation in eastern European economies, and specifically the role that the European Central Bank might take in the future. What would your message be to politicians from some of those countries who are suggesting the ECB could do more, for instance by accepting collateral in assets from some of the local currencies?

Trichet: On the first question, as I said, we did not decide ex-ante that we were at the lowest level. If justified by facts and figures, if some of the risks that I mentioned are materialising, I clearly won’t rule out the main policy rate being changed, indeed going down. That is clear. I will also mention the fact that, as regards the interest rate of the deposit facility the present level, which is 0.5%, is already a very, very low rate. These are the two comments I will make in response to your first question.

On your second question, again, we are reflecting on what is likely to be done. You know that we are in a different situation in comparison with other sister institutions over the Channel or over the Atlantic. We do not have the same financial system in front of us. From the outset, we have been extraordinarily forthcoming in comparison with the other central banks as regards collateral. We have even enlarged the list of eligible collateral. The commercial banks are playing a much more important role in the euro area than it is the case in the United States in particular, but perhaps also in the United Kingdom. So it is not surprising that we have concentrated our attention on commercial banks and on being as forthcoming as possible as regards this channel. On top of the openness to the eligibility of collateral, you will remember that we were the first to go for longer-term refinancing. We are engaging in this unlimited supply of liquidity on a longer-term basis, and today we have taken a new very important decision to pursue this concept of unlimited refinancing for as long as needed and at least beyond the end of the year. All this shows that, as regards non-standard measures, we are concentrating very much on what fits the very structure of the euro area. That being said, we do not feel that we should exclude other operations. At this stage I would prefer to qualify them – and this is also the way Ben Bernanke is qualifying such operations – more as credit easing than quantitative easing. Again, in terms of quantity, we already have a very significant level of non-standard quantitative risk-taking that is very visible.

In response to your final question on eastern Europe at this stage our position would be that it is extremely important that we do not change any frameworks. We have established rules concerning membership of ERM II or the euro. And sticking to the rules as they are is very important for the stability of the European Union as a whole. It is not good to suggest that some are in such a weak situation that you would amend the rules for the sake of that situation. I feel that it is important to stick to the present framework as it is.

Question: Mr Trichet, two questions, please, one is: Could you again elaborate a bit more on your or the ECB’s problems with zero interest rate policy; the arguments which would prevent the ECB from lowering the main refinancing rate to zero.

And secondly, another question on the non-standard measures: If you cannot tell us what measures the Council would prefer at the moment, could you at least give us a sort of time frame for when a decision on this might take place. Or do you think you have unlimited time to decide when to pursue those non-standard measures, because time is a bit short at the moment, is it not?

Trichet: On your first question, time is short and that is why we are taking important decisions. We have taken important decisions in the past few months and we have taken important decisions today with commitments that go beyond the end of the year.

As regards your second question on non-standard measures, as I said we are in discussions. I am not ruling anything out. We are not pre-committed to anything. When the time comes, you will know what we have decided. And I shall give you regular updates at our press briefings, but I do not pre-commit to any particular time. In any case, we have proved that we have been able to take decisions at any time when necessary including in exceptional unforeseen circumstances. And, as I have repeatedly said today, uncertainty is the mark of the time. With regard to why we think that zero interest rates would be very inconvenient, I will not elaborate any further. It is clearly an assessment that we have made.

Question: Just to follow up on your outlook for price stability which goes below 2% next year. How high would you say is the risk of deflation in the euro area?

And my second question is: you know that there are also preparations in the euro area by politicians on how to assist countries in trouble within the euro area, not eastern Europe. I was wondering whether you would say you support these preparations or would you say that this goes too far and violates the Treaty?

Trichet: On your first question, we are looking very carefully and constantly at the possible risk of deflation – as the OECD and the IMF are doing. The conclusion of the international institutions in general is that such risks are very minimal in our case. And one of the reasons why they are very minimal is that, to substantiate deflation, not only inflation on the basis of the CPI observed during a sufficiently long period of time must be negative but must it must also drive inflation expectations themselves to be negative, so that you have the downward spiral that characterises deflation. In our case, thanks to our definition of price stability and thanks to the very clear understanding by economic agents such as seen via the Survey of Professional Forecasters, since the introduction of the euro we have had quite a remarkable anchoring of inflation expectations. And when you look at the medium-term inflation expectations, whether they are extracted from surveys or whether they are extracted from the financial markets, on a medium-term basis they are very well-anchored. We must take care of that, it is not something which can be taken for granted eternally, but it helps us considerably in circumstances in which there are significant inflationary risks. We proved that we were able to weather periods which were very demanding in times of upside risks for inflation. It helps us also very much to weather periods in which, on the contrary, there might be downward pressure on inflation. So no, there is no substantiation of any significant risk of deflation and we are considerably helped by our definition of price stability and by the anchoring of medium-term inflation expectations.

As regards your second question on the issue of members of the euro area that could be in extreme difficulty, first of all the euro area is an area where you have considerable automatic help through the very existence of the single currency itself. For instance the balance of payment deficit, if any, is financed automatically by virtue of belonging to the euro area. Let us not forget that. I say regularly when I am asked more direct questions that I do not comment on absurd hypotheses. I have confidence in the capacity of the governments of the euro area, in line with their own pre-eminent responsibility, to convince their own people and the markets that they are going in the right direction and that they are credible as regards the medium- to long-term path for sound fiscal policies that I mentioned on behalf of the Governing Council in the introductory remarks.

Question: Three questions Mr Trichet. First of all you have a statement in here where you speak about how it has become clear that key ECB interest rates are being passed through the monetary transmission mechanism. Should we understand that as an argument against additional non-standard measures that so to speak the mechanisms are returning to their previous functioning?

A second question regarding the rules you apply to entering the euro zone. Those of us within this room know you are very attached to the Treaty but you do have some flexibility on how you define the best performing three members of the euro zone in calculating the inflation target. At this point that formula seems a bit odd, because it would suggest that countries need to deflate in order to meet criteria, which I am sure you do not want them to do. Have you given any thought in this direction to whether this is still appropriate going forward?

And for my third question, I would like to hear your thoughts on what you feel western Europe’s responsibilities are to the new EU Member States that joined in 2004. There is a situation of mutual dependence there in many ways, it is obviously not standard procedure to ”so to speak” grab your neighbours under the arms in difficult times in the EU, but these are not normal times. What are your thoughts on that?

Trichet: On your first question we mentioned that the pass-through was functioning in a way which was not significantly hampered. That is the description we are using. It is true that when we look at the functioning of our money market and the impact that we have through our policy decisions on the EURIBOR market interest rates, including three-month interest rates for instance, we have observed that the functioning of the money market and the pass-through of these monetary policy decisions was not significantly hampered. This is not to say that we exclude ex-ante additional non-standard measures, because I said that if it functions quite well in our judgement, despite the acute tensions that we have to cope with it is precisely because we have taken non-standard measures. Again, to be clear on the response to your question, we would not exclude other non-standard measures.

On your second question at this stage we are in agreement with the European Commission and with the governments as a group in considering that it is not appropriate to reflect on transforming or loosening the criteria. We do not think that it would help anybody at this stage, neither the countries concerned nor the euro area itself.

On the third point, I would make the following comments. You mention “western Europe” so your question is independent of belonging or not to the euro area. You assume it is possible to make a distinction between the western part of Europe and the eastern part of Europe, which I do not like since we are all on exactly the same footing and the only pertinent differences for me are that some are members of the euro area, others are members of ERM II, others are members of the European Union without being members of the euro area or ERM II and others are out of the European Union itself. And one could also say that you have candidate countries and non-candidate countries. So these are the pertinent distinctions that you can make between the various countries. The European countries in general themselves, and particularly the eastern and central European countries, are very keen on saying that they exist in their own right and that they have their own economic and financial features and characteristics. Some of them would say that they are in a situation which is difficult and would ask for help, while others would say that they are in a situation which is solid and strong and resilient and they should not all be confused. If and when particular countries might have major difficulties, it is always possible, as has been proved in several cases, that there is help available from the European Union itself and from the European Commission and which is backed by governments. There is additional help, which can be given on a bilateral basis, as has been the case for Latvia for instance. There is also help which can come from international institutions, such when the IMF is involved. We ourselves, as we have done for some countries, can have repo agreements that would also be helpful in those circumstances. But that is for those countries that have an exceptional difficulty and that are calling for help to finance a recovery programme that is convincing. But we are all on the same continent and we must all care for our own resilience, because the resilience of the euro area itself is very important for all our partners. Our first duty is to understand that we are all interdependent and that it is very important that we continue to be “good clients” for the eastern and central European countries that are exporting to the euro area.

Question: You said you did not decide that you are at the lowest level when it comes to the refinancing rate, yet you see drawbacks to zero rates. What does that mean? When it comes to the floor, where do you see it?

Trichet: I will not comment more on that.

Question: Okay, if I could then ask you, could you tell us about the ECB’s accounts? Were they in surplus last year? How much did the eurozone central banks earn on liquidity operations, and were there any write-downs or losses associated with holding back collateral?

Trichet: That is an excellent question, because I wanted to say a word on that. So, I would first mention the European Central Bank itself. We approved today the audited annual accounts of the ECB for the year ending 31 December 2008. At the end of this press conference you will have the press release. We had a surplus in 2008 of €2.661 billion, which compares with a surplus of €286 million in 2007 that reflected very much the effects of the euro’s appreciation against the US dollar and, to a lesser extent, the Japanese yen. So again we had a surplus of approximately €2.7 billion in 2008. As regards the risk exposure of the ECB, based upon our assessment, an amount of €1.339 billion was transferred from this surplus to the provision that we are making against foreign exchange risk, interest rate and gold price risks. So we declared a net result of €1.322 billion. The provision would be used to cover possible losses arising from the risks that I mentioned. Today we have decided to distribute the remaining €116 million, because we had already transferred to the national central banks the bulk of the net result, namely €1.2 billion. You will have all the details in a press release after the press conference.

Now, I would like to refer to the Eurosystem monetary policy operations in 2008, not only at the level of the ECB, but at the level of the Eurosystem as a whole. The income from monetary policy operations is expected to amount to around €28.7 billion in 2008, which is superior to what we had observed in 2007 for Eurosystem income from monetary operations. In 2007 we had €23.2 billion. If I now take the aggregate net result of the Eurosystem national central banks, including the distribution of the net result that the ECB has been distributed to the NCBs and which goes onto their own balance sheet, then this net result is estimated to be approximately €16.8 billion for 2008. The year before, the aggregate net result was €15.2 billion. Again this information will be detailed in a press release, which will be available after the press conference. In the autumn of 2008 we had five counterparties that defaulted on refinancing operations undertaken by the Eurosystem, namely Lehman Brothers Bankhaus AG, three subsidiaries of Icelandic banks, and Indover NL. The total nominal value of the Eurosystem’s claims on these credit institutions amounted to some €10.3 billion at the end of 2008. We have looked at this, and the decision we have taken is that any shortfall, if it were to materialise, on the amount of claims that we have, should eventually be shared in full by the Eurosystem NCBs in accordance with Article 32.4 of the Statute of the ESCB, in proportion to the prevailing ECB capital key shares of these NCBs in 2008. As a matter of prudence, we also decided at the level of the Governing Council, that the NCBs should establish their respective shares of an appropriate total provision in their annual accounts for 2008 as a buffer against possible risks arising for the monetary policy operations. The size of the total provision at the level of the Eurosystem as a whole will amount to €5.7 billion. The net figures I gave you – for the level of the net result of the Eurosystem - namely approximately €16.8 billion is calculated after this provisioning. Exactly the same applies to the ECB. The ECB has made provisions and the net result we have distributed to the national central banks was after our provision. To give you an idea of the order of magnitude of our provisioning, when I pile up all the provisioning we have made in the ECB – I am speaking of the ECB alone, and not of the Eurosystem – that it is now around €4 billion. It is the total provisioning we have made in order to face up to potential risks.

Question: I just wanted to pick up on your unprompted remarks, I think you made them twice, about the deposit rate, that you decided to keep the corridor at 100 basis points. Can we assume - is it right to interpret it so - that you are actively considering narrowing the corridor again, and that you may actually do that before you embark on any other non-conventional measures? And also, if you are saying that 1.5% is not the limit, could we see a rate cut as soon as next month?

Trichet: Again, we will do whatever is necessary and I will not comment more on future decisions. I said that we had not decided ex-ante that we are at the lowest point as regards the main refinancing operation interest rate. I also mentioned that at 0.5% the deposit interest rate was at a very, very low level, also taking into account that the unlimited supply of liquidity which we operate, and are bound to operate for a long period of time, is something which pushes down the EONIA, not far away from the level of this deposit facility interest rate. That is the only remark I make, but you, of course, took it rightly so.

Question: You say you are ruling out no possible measures that you might take, these unorthodox measures, but your hands must be tied to some degree by your own charter. Are there certain things that you can rule out at this point, perhaps with regard to buying commercial paper? You are not the Federal Reserve; you are not the Bank of England. To what extent are your hands tied?

Trichet: Our hands are not tied at all. We will do whatever we judge appropriate, taking into account the situation. We are not exactly in the same situation as the United States or the United Kingdom, and everybody knows that. So we have to optimise what we do. As regards the set of non-standard measures, I have already said that we have already adopted a large number of non-standard measures, and I can elaborate more on that. We will do what we judge appropriate. Our hands are not tied; I am ruling nothing out, as I have said. If our hands were tied in a certain direction, I would say at this stage that we had a sense that we were ruling out this or that. But I’m not saying that. I’m not committing myself to anything, and the fact that sister institutions are doing this or that does not mean that we should do the same. I have said, since the very beginning we have been in a very different situation. We also have to take into account the fact that the commercial banks are our main channel on this side of the Atlantic, by comparison with the other side of the Atlantic.

Now, let me say, in order to ensure that you don’t miss any information, that the next Governing Council meeting and press conference on 2 April will take place here, and not in Italy, as it had been envisaged at a certain point in time. So, I want to make it clear that the next meeting will be in Frankfurt. We will have the external meeting in Luxembourg on 2 July. You know that and it is published on the website. I just wanted to confirm that. And it is on 8 October that we will be in Italy.