BSI Economics Flash June 6, 2014:
News:
– Yesterday, Thursday, June 6, the ECB held its monthly press conference, during which Mario Draghi announced a number of new unconventional measures to combat deflation.
– Unnoticed or uncommented on by many observers, Mario Draghi made a surprising mistake during the question and answer session, formally (and incorrectly) denying an aspect of what has been his key program to date: the OMT.
– Although the Governor corrected his mistake five minutes later, the event stands out as unusual in a context where communication has become the number one weapon of central bankers
– This seemingly insignificant event has led some, such as the Wall Street Journal (the only publication to have reacted so far), to believe that the ECB no longer attaches much importance to the OMT and does not really intend to use it, as many had claimed. The ECB’s constructive ambiguity regarding this program, which could prove useful in the event of an unforeseen shock, may thus be slightly altered. This type of event, which is rare and (hopefully) more anecdotal than anything else, should not, however, be too detrimental to the ECB’s new program, which will logically be the key element in the coming months.
–
It is not uncommon to hear politicians deny statements they have made. In politics, this is acceptable. In the world of central banks, however, it is usually unthinkable. This is because the statements made by central bankers are now the cornerstone of their policy: communication is the number one weapon in the current context, where rates have reached rock bottom. However, Mario Draghi made a mistake that may seem incredible for a central banker during his press conference on Thursday, June 6, 2014: he himself denied the commitments he had made two years earlier, only realizing his mistake five minutes later.
In September 2012, Mario Draghi announced the implementation of OMT (Outright Monetary Transactions). As part of this program, he indicated that the ECB was prepared to purchase unlimited amounts of sovereign bonds from certain eurozone countries. He also specified that the liquidity injected under this program would be fully sterilized: when the central bank made its purchases, the money injected through the operation would be instantly withdrawn from the economy. This operation, about which we had already expressed some questions here while explaining the possible modalities of action, was intended to make asset purchases « non-inflationary. »
It was therefore with good intentions that a Wall Street Journal journalist asked Mario Draghi, who had just announced the end of SMP sterilization (another asset purchase program launched in 2010 that was also to be sterilized according to the ECB), if he also intended to eventually question the sterilization of the OMT, should it be triggered. The question is an interesting one, and Mario Draghi futilely sidesteps it by saying that the two policies have nothing to do with each other. However, he fails to answer the question about the « sterilization » of interventions. A slight silence ensues and the ECB Vice President whispers something in Mario Draghi’s ear, who then declares , « The Vice President points out that we never said we would sterilize the OMT » (minute 28:20 of the video here). A short silence follows. The embarrassed journalist slips in a quiet « I don’t think so, « which nevertheless does not seem to elicit the slightest emotion from Mario Draghi. The central banker then continues the press conference. It was only six minutes later that he realized his mistake, stating (at minute 34:40) , « Let me come back to what I said earlier (…) yes, there was a commitment to sterilize the OMT, « leaving the room indifferent.
While to err is human, and Mario Draghi, although often compared to Super Mario, is also human, the fact remains that this type of error, relating to what had been the key program of Draghi’s presidency until then, is rare among central bankers of such importance. How could Mario Draghi have forgotten, in a matter of seconds, the terms of his flagship program at the ECB, which had not yet been launched but was on the minds of all investors? The mistake seems truly unthinkable for a central banker of this stature. However, it is not a dramatic one, as it was (fortunately) corrected a few minutes later, and also because it relates to a program that has not yet been launched and has been overshadowed in the media by the measures announced at the press conference on the same day. However, this mistake may still lead some to believe that the OMT is not really a topic of discussion within the ECB, and that Mario Draghi does not really intend to implement this program. This is what the Wall Street Journal suggests in an article on Mario Draghi’s « oversight, » available here. Admittedly, the ECB has announced new unconventional instruments, but the fact remains that the credibility of the OMT, often referred to as the ECB’s « bazooka, » must be preserved, if only in the event of a sudden deterioration in the situation. The « bazooka » should not turn into a « water pistol » in the event of an unforeseen shock.
In this context, if this « gaffe » is Mario Draghi’s first at a press conference, it would be better for the ECB if it were also one of his last. Few things could damage the credibility of the ECB’s program more than a series of remarks about the « gaffes » of its president, who, according to many observers, has so far performed his duties with a charisma and professionalism worthy of his position.
J.P.
References:
Wall Street Journal article « Draghi finds it hard to remember what he’s never done » available here
Video conference: http://www.ecb.europa.eu/press/tvservices/webcast/html/webcast_140605.en.html
(The event takes place at minute 28:20; the correction at minute 34:40)
Written translation: http://www.bloomberg.com/news/2014-06-05/european-central-bank-president-draghi-news-conference-text-.html
The « gaffe » occurs after the question from Brian Blackstone, Wall Street Journal. The correction occurs after the question from Claire Jones, Financial Times.
UNWTO action plan: http://etudes-economiques.credit-agricole.com/medias/EF12_31_FR_20120907_FD.pdf
