The Almunia Syllogism

European Monetary Affairs Commissioner Joaquín Almunia recently, and possibly inadvertenly, recently stumbled on a very interesting argument. Here it is:

"Who is crazy enough to leave the euro area? Nobody," Almunia said. "The number of candidates to join the euro area increases. The number of candidates to leave the euro area is zero."

Reductio Ad Absurdum

Now you don't need a PhD in economics to understand what follows, although a little bit of basic logic would help. What we have here could be construed as a kind of syllogism (and from now on let's christen this one "The Almunia Syllogism"). The Almunia Syllogism has the following form:

a) Anyone leaving (or aiding and abetting the departure of someone from) the Eurozone is crazy
b) The EU Commission, The ECB and The National Leaders are not crazy
c) Therefore no one will leave, or be allowed to leave, the eurozone (at least under current conditions)

Q.E.D. We Will Have A United States Of Europe.

Well, ok, I do need to add a lettle lemma here to the effect that the only way to enforce (c) is to build the necessary architecture, and there is room for debate about this, since this lemma is neither proven, nor is it self evident, although my own opinion is that in the weeks and months to come its validity will become extraordinarily clear even to the most reticent among us. The thing about the lemma is that it focuses the debate. Those who do not agree need to be able to show how we can have (c) within the present architecture. ECB Executive Board member Lorenzo Bini Smaghi's attempt to argue that we can (for example, here)fails stupendously to convince in my opinion, and especially the extract I reproduce below(which exemplifies precisely the point those who want new achitecture are making).

For instance, for the period 2009-10, discretionary measures adopted in Germany total 3.5% of GDP, compared with 3.8%in the United States. In some European countries, such as Italy, the size of such stimulus measures is relatively limited owing to the high levels of debt, but in other countries the total fiscal stimulus is larger than in the United States.

The whole issue is that we need a mechanism to average out the stimulus, is that so hard to understand? Is this obscurantism, or simply stupidity?

A Literary Trope Not A Syllogism

The formal validity of the following statement is rather more questionable.

"Don't fear for this moment," he said. "We are equipped intellectually, politically and economically to face this crisis scenario. But by definition these kinds of things should not be explained in public."

The first phrase is an exhortation, one which I would agree with (but not for the same reasons), the second is an assertion whose truth content is, at least,questionable, while the third is an admission, one which would perhaps better not have been made, or a piece of advice, which the unfortunate Otto Bernhardt seems never to have received.

A senior German lawmaker said euro zone states stood ready to come to the aid of financially fragile members of the currency bloc, sparking furious denials from European leaders that a specific rescue plan existed. Otto Bernhardt, a leading lawmaker in Angela Merkel's Christian Democrats (CDU), told Reuters in an interview late on Thursday: "There is a plan."

and then Bloomberg let us know a bit more about the details of the plan.

The German Finance Ministry has no knowledge of a rescue fund organized by the European Central Bank for troubled euro-region members such as Ireland and Greece, spokeswoman Jeanette Schwamberger said.

Otto Bernhardt, finance spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview with Reuters today that the ECB has a fund at its disposal to help troubled countries and can make money available at 24 hours’ notice.

Calls to relax eurozone rules rebuffed

From the FT this morning:

Calls to relax eurozone rules rebuffed
By Tony Barber in Brussels

Published: March 10 2009 08:48 | Last updated: March 10 2009 12:24

European Union countries hoping for milder terms on which to adopt the euro faced a rebuff on Tuesday from eurozone finance ministers, who said the credibility of Europe’s monetary union required sticking to EU rules.

“Given the current volatility of the situation, this would not be the right time to launch a debate on this,” said Jean-Claude Juncker, Luxembourg’s prime minister and head of the 16-nation eurozone finance ministers’ group.

The ministers’ decision is likely to be interpreted in some of the EU’s central and eastern European states, especially Hungary, as a sign that richer western European countries are failing to meet the challenge of helping their new democratic neighbours in the most difficult hour of their post-communist history.

Hungary last month raised the idea of shortening the two-year spell that a eurozone candidate country is obliged to spend in the EU’s exchange rate mechanism, known as ERM-2.

The proposal has won support from Thomas Mirow, president of the European Bank for Reconstruction and Development, who said last week the waiting time should be reduced on condition that a candidate country met all the EU’s rules on budgetary discipline.

The ERM-2’s purpose is to establish that a country’s currency is stable enough to justify eurozone membership.

But Hungary contends that the world financial crisis is so serious that some economically battered central and eastern European states need the protection offered by the eurozone sooner rather than later.

At an informal EU summit on March 1, Angela Merkel, Germany’s chancellor, suggested that she was open to reconsidering the ERM-2 process, but not to relaxing other tests for eurozone candidate countries on budget deficits, inflation, interest rates and public debt.

Mr Juncker said on Monday night that the eurozone finance ministers had agreed that careful adherence to the rules was essential, because the eurozone, unlike the US and other single-currency areas, lacked a central government and fiscal authority.

“We have a monetary union which doesn’t have a central state. It must be based on a set of rules. They are made up of the [EU’s governing] treaty and the stability and growth pact, and there is no question of changing the criteria or changing the amount of time that an aspirant must stay in the ERM-2, to bring it down from two years to one year,” Mr Juncker said.

“The credibility of monetary union is at stake,” he declared.

Mr Juncker was speaking after discussions during which EU policymakers confirmed that Romania was seeking a EU financial aid package similar to those arranged late last year for Hungary and Latvia, its fellow former communist member-states.

The EU recently doubled to €25bn the resources of a fund that helps non-eurozone EU countries address their balance of payments problems. Hungary and Latvia have both drawn on the fund.

But Mr Juncker made clear that eurozone finance ministers had no appetite for a much bigger, across-the-board financial aid package for central and eastern Europe, as proposed by Hungary.

“We refuse to accept that they represent one bloc. That has no longer applied since the fall of the Berlin Wall,” he said.

Trade and Shrinkage

From the FT this morning:

Explanation for trade plunge proves elusive
By Alan Beattie in Washington

Published: March 8 2009 23:31 | Last updated: March 8 2009 23:31

As world trade plunges, governments are looking for an explanation. Is it a fall in demand, a shortage of trade finance or protectionism? On the answer hangs the response they need to stop globalisation going into reverse.


International trade has long been more volatile than overall economic growth, partly because it is largely made up of manufactured goods that are subject to big swings in inventories and because imported consumer goods are often the first to be cut in a downturn.

But even allowing for the descent into recession, the speed of the collapse in trade has caused surprise. Trade has grown two to three times more quickly than the world economy in recent years, but countries with trade data for January show on average a 31 per cent fall over January 2008.

Protectionism is the easiest to eliminate. In spite of fears of another era of economic nationalism and a rise in emergency so-called anti-dumping duties, the use of such tariffs is low.

But there is confusion about the other possibilities.

The cost of trade credit, which finances goods while in transit, has surged in the past year. Participants say financing a shipment might have cost 60 basis points more than the London interbank offered rate a couple of years ago but now costs 400bp. Some developments, such as countries being unable to ship grain or resorting to barter, have been blamed on such shortages.

In particular, while some of the big providers of trade finance are still active, the smaller banks that used to buy trade finance assets from them in a secondary market have pulled in their horns. John Ahearn, head of trade finance at Citigroup, says: “Demand for finance has risen as a result of perceptions of higher risk at a time when a lot of capacity in the trade credit world has come offline and the secondary market has shrunk dramatically.” The World Bank, along with national export credit agencies, has announ­ced programmes of subsidy to trade finance.

But as the bank admits, the policy response has to contend with a lack of reliable figures. Data from Dealogic, the consultancy, suggest global trade finance shrank by 40 per cent in the last quarter of 2008, but those figures do not cover the bulk of such credit.

While commerce in low-value bulk commodities may have been hit by a shortage of trade finance, business that does not rely on such credit has also fallen.

About a third of global trade involves intra-company transfers. Simeon Djankov, chief economist for finance and the private sector at the World Bank, says research shows trade falling across the board. “The problems with demand swamp those of supply,” he says.

A general reassessment of risk among financial institutions and companies may have hurt smaller and poorer countries now cut out of global supply chains, but bank lending in trade finance has held up well compared with their activities elsewhere, he says. It might be easier politically to justify targeting government support on trade finance rather than boosting bank liquidity but the effect of such subsidy is unclear.

Mr Ahearn says an advantage of direct official support for liquidity in trade finance as opposed to pumping money into the financial system generally is that the result can be monitored.

“If governments come in and help recreate the secondary market and there is no demand for it, at least we will have ruled it out as one of the main reasons for the fall in trade,” he adds.

An L Of A Recession

Wolfgang Munchau in the FT:


An L of a recession – reform is the way out
By Wolfgang Münchau

Published: March 8 2009 18:15 | Last updated: March 8 2009 18:15

The US is dragging its feet over the financial sector. The European Union is doing the same, as well as failing to adopt policies that could shield it from an increasingly probable speculative attack. And judging by the state of preparations, the forthcoming Group of 20 summit is going to be a disaster.

So it looks like it is going to be an L – not a V or a U. I mean an L-shaped recession, one that starts with a steep decline, followed by very low growth for many years. In a V-type recession, the recovery is instant. In a U-type, it comes eventually. My guess is that we are currently somewhere in the middle of the vertical bit of the L, but it is the horizontal bit that is the scariest. History never repeats itself exactly, but we know from economic history that financial crises are surprisingly similar. This looks like Japan all over. Without financial restructuring, the economy is not going to recover. And Japan was lucky. It was surrounded by a booming global economy.

The best way to fight such a disaster is to restructure the banking system and provide short-term economic stimulus through monetary and fiscal policy. Speaking at a recent Aspen Italia conference in Rome, Martin Feldstein, a former economic adviser to Ronald Reagan and president of the National Bureau of Economic Research, estimated that US consumer spending would fall by $500bn (€395m, £355bn) annually, and construction spending by $250bn. Against this combined annual $750bn shortfall, the current stimulus package is woefully inadequate. In other words: we are looking at an L.

An L-shaped recession will make the adjustment of balance sheets even more painful. Unemployment will continue to rise. House prices will keep on falling. US consumers and banks will spend the next five or more years deleveraging, getting their respective balance sheets back in order. In that period, the US current-account deficit will fall sharply, as will that of the UK, Spain and several central and eastern European countries. This process can take a long time, and in an L-shaped recession it takes longer.

But the effect is also brutal on the rest of the world. The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan. Globally, current-account deficits and surpluses add up to zero – minus some statistical reporting errors. You can do the maths. If the US stops buying German cars, Germany will eventually stop making them.

If we had a simple U-shaped recession, we would still have a painful recession in Germany and Japan, for example. But under a U-shaped scenario, both countries would be among the first to benefit from the recovery.

In an L-shaped recession, however, recession gives way to depression, despite the fact that both countries thought they had done their “homework”. If nobody can afford to run a large deficit for a long time – which is what an L recession effectively implies – the economic models of Germany and Japan will no longer work. Germany had a current-account surplus of more than 7 per cent last year. It is the world’s largest exporter. Exports constitute about 41 per cent of national gross domestic product – an extraordinary number, given the size of the country.

So what should these countries do? The right policy response would be to reduce the dependency on exports and undertake structural reforms that facilitate the shift towards non-tradable goods. These are not the same type of structural reforms as those of the past, involving cost-cutting and improving competitiveness. This is about flexibility and mobility.

Unfortunately, the opposite is happening. Germany is clinging to its export model like a drug addict. An example is the debate about the future of Opel, the European car manufacturing subsidiary of General Motors. Opel is unlikely to survive without help from the government. The proponents of a state bail-out of Opel argue that the company is systemically relevant. This argument is obviously wrong. There can be systemically relevant banks, but there can be no systemically relevant carmakers. But the answer is also revealing. What it means is that Opel is systemically relevant for the country’s export-oriented model. The bail-out adherents are clinging to an industrial structure that has no hope of survival in an L-shaped world.

To her credit, Angela Merkel, the German chancellor, seems reluctant to agree to the bail-out, as is her party. But pre-election politics will make a bail-out of some sort likely. It is terrible economics. The problem is not even the waste of taxpayers’ money. Combined with French car subsidies, such a decision will contribute to massive overcapacity in the sector and will slow down the economy’s adjustment to the export shock.

We are nowhere near a solution to the crisis. After committing errors of omission, global leaders are now producing errors of commission. The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares.

Slouching Towards Brusselfurt?

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,

And what rough beast,
its hour come round at last,
Slouches towards Bethlehem to be born?
W.B. Yeats

Jack London's story White Fang, tells the tale of two men who trudge across the snow swept landscape of the Alaskan Frontier accompanying a sled-dog team hauling a dead man in a coffin. All along their problem-ridden route the two men are stalked by a staunch pack of starving wolves, headed by a sensual, seductive but mortally dangerous she wolf. Heeding instinctively the siren call of the she wolf, all the dogs are drawn, one by one, away from the warmth and safety of the communal campfire only to get themselves eaten and killed. Finally even one of the trekkers himself succumbs. Of course the coffin and its contents (which was the whole point of the expedition) are irretrievably lost, but not everything here is a negative, since in the process the she wolf mates with one of the luckless victims giving birth to a hybrid creature: White Fang.

This modern "half breed", of course, and in true Darwinian fashion, grows up even more savage, morose, solitary, and deadly than any of those who gave birth to him.

It isn't hard to see how this moving allegorically could be easily applied in its entirety to the process of European Economic and Political Unification, but in the short essay I embark on here I will meticulously avoid the temptation of attempting to offer deeper pschoanalytic interpretations, nor will I address the tricky little question of what might lie inside that irretrievably lost coffin. I will simply focus on the much more direct question of whether it is, at the end of the day such a good idea to let all those sled dogs wander off and out one at a time into the night, straight into the jaws of those ever so hungry wolves.

Severe Economic Recession

Hope they tell us, does spring eternal, but evidently some eternities are shorter than others, and all hope that Europe’s battered economies might be just about to turn themselves around must by now be in even shorter supply than the credit our companies and consumers are looking to find in the local branch of their favourite bank. The latest nail in the aforementioned coffin comes from the news that February's Purchasing Manager surveys, which provide us with one of the most accurate and valid short term indicators we have, showed a record low for the second month running. Thus, barring some spectacular (and entirely improbable) turnaround in March, it now seems almost a done deal that first quarter eurozone GDP will contract at a more rapid rate than even the one we saw in the last quarter of 2008. So, having fallen by 0.2% in the third quarter of last year, and by 1.5% in the fourth one, we may well see a further 2% drop in this one. Not quite Japan territory yet, but not far from it.


Post Bubble Blues In Spain and Ireland

Of course, there are not one, but many "Europe's", each, as Tolstoy would have it, "unhappy" in his or her own unique way. Spain, which is Europe’s fifth-biggest economy, entered its first recession in 15 years at the end of last year, and is now suffering (along with Ireland) the most severe of impacts following the blowout of a ten year housing bubble, a bubble which was fuelled for the most part by the negative interest rates which were served up under the ECB's "one size fits all" monetary policy. Forecasts for Spanish GDP growth in 2009 range from minus 3% to minus 5%, and unemployment looks set to reach around 5 million (or 20% of the working population) come December.

The Spanish government is still essentially in denial about the scale of the correction needed (especially given the need to bring the 10% of GDP current account deficit that was created back into balance), and is busy trying to spend its way out of trouble with the predictable negative consequence that the country's once solid fiscal surplus is now spiraling downwards into deficit at breathtaking speed (the deficit is forecast to reach a minimum of 6% of GDP this year). And the result of all this was not hard to foresee, as credit rating agency Standard & Poor’s announced last month that it was cutting Spain’s AAA long-term sovereign rating to AA+. Predictably, the yield spread between 10 year Spanish bonds and German Bunds rose to a record 122 on the news.

At the same time it was not so long ago that Ireland's economy was experiencing a boom of such proportions it came to be known as the "Celtic tiger." But that was then, in the world as we knew it before the arrival of the "US subprime turmoil". Now things have changed, almost beyond recognition. The EU Commission forecasts a 5% contraction in GDP this year, unemployment is widely expected to hit the11 percent level, and house prices have plummeted. As a result the Irish fiscal deficit is expected to rise to 9.4% in 2009, after hitting 6.3% in 2008, the EU Commission has opened an excess deficit procedure, and the country is being threatened with losing its AAA debt rating by Fitch Ratings.

The situation is so severe that the Irish Prime Minister was only recently forced to issue strenuous denials that he was threatening the unions with bringing in the IMF if they did not agree to immediate wage reductions in the public sector. As a result of the crisis the cost of insuring against a default on Irish sovereign debt has risen steadily, with credit-default swaps on Irish government debt hitting a record 396 basis points in the middle of February.


Meltdown In The East?


But the EU is not only facing new problems with former growth stars inside the tent (growth in Italy and Portugal remained decidedly lacklustre even after the creation of the eurozone), there are also important and growing issues arising among the EU's most recent members, those still waiting patiently in line at the entry point to the monetary union's ticket holder's enclosure.

Only two weeks ago World Bank president, Robert Zoellick, felt himself forced to make an urgent call for a European Union-led and co-ordinated global support programme for the economies of Central and Eastern Europe. As Zoellick himself said, “It’s 20 years after Europe was united in 1989 – what a tragedy if you allow Europe to split again.”

Eastern Europe's economies, and their banking systems, are now starting to feel the chill winds of the global financial crisis and recession. But the situation in Eastern Europe is very different from that in the West, and their economies and credit ratings evidently can’t support such dramatic increases in their debt levels. Thus, in the case of those countries having a significant home-banking presence, like Latvia’s Parex, or Hungary’s OTP, the support of external organisations (the IMF, the World Bank, the EU) becomes rapidly necessary when the bank in question starts to have liquidity problems. Then, as a direct result of the consequent bailout the country's debt to GDP ratio starts to rise in a way which then places even subsequent eurozone membership in jeopardy. Latvia’s Debt/GDP is, for example set to rise from around 12% of GDP in 2007 to over 55% in 2010, even on the best case scenario. With a 10% plus GDP contraction already in the works for 2009, it is clear that Latvia’s debt to GDP will rise beyond the critical 60% level. Hungary’s debt/GDP is already above, and rising. If we don’t do something soon, these two countries at least are being launched off towards a self perpetuating process of indebtedness which only has one end point: sovereign default.

And while Latvia and Hungary may be the current worst case scenarios, the list of walking wounded is growing by the day.


In fact Robert Zoellick is far from being a lone voice crying in the wilderness about the current level of risk to the countries in the East, and indeed precisely those EU banks who have been most active in emerging Europe are now busily trying to convince EU regulators, the European Central Bank and Brussels itself to coordinate new measures to counter the impact of the financial crisis confronting the region.

While Storm Clouds Gather In the North

And now, with some ten countries out there (to one degree or another, and despite the cries of "we're different") desperately looking for help from the East, 5 (including Austria) about to do so from the South, and two more (if we include the UK and along with Ireland) from the West, news has come in that one last group of battle weary combatants have finally made their way through to the hastily erected field hospitals in Frankfurt and Brussels - the Scandinavian countries - since it emerged last week that Sweden is in the middle of a much more serious recession than previously thought. Official figures for the fourth quarter of last year revealed that gross domestic product contracted 2.4 per cent quarter-on-quarter in the final three months of last year, equivalent to an annualised decline of 9.3 per cent. Denmark’s economy, on the other hand contracted by 3.9 per cent year-on-year in the fourth quarter, making this already the worst recession in three decades.Denmark is in the middle of a housing bust and the economy contracted as households spent less and the global financial crisis sapped demand for the country’s exports. Finnish output also slumped, by 1.3 percent, the most in 17 years, in the fourth quarter. Certainly the situation is less severe in the North, but in addition to the home grown recession Sweden's troubled banking sector now labours under the growing weight of debt defaults in the Baltic's and other parts of the CEE.

Severe Contraction In Germany

So with the periphery down (if not positively out for the count), all eyes have been turning to the centre, and it has fallen to Germany's Finance Minister - Peer Steinbrüeck - to face the cameras on an almost daily basis to answer the barrage of press questions about how equipped the EU is to handle all the looming bailouts, as if reaching for the German chequebook was the magic remedy to cure all ills. Unfortunately nothing could be further from the truth. Germany's banking sector has been bruised and battered itself over the months, first in the US sub-prime turmoil, then in Ireland and now in the East. While Germany’s export driven-economy has suffered the impact of recession after recession among its main customers. The economic slump in the final quarter of 2008 proved worse than feared, with the country posting the sharpest fall in gross domestic product since the country was reunified in the early 1990s.

And there is evidently worse to come, since the Germany private sector shrank in February at its fastest rate in more than a decade according to Purchasing Managers survey data - with the composite PMI falling to 36.3 from 38.0 in January, the lowest level registered since the series began in January 1998. The neutral point between expansion and contraction on these diffusion indexes is fifty, and a reading around 36 is compatible with an annualised contraction rate in the region of 10%.

Deflation Threat

And to top it all the eurozone looks like it is headed rapidly into negative price change territory, or deflation, since the headline HICP inflation fell back significantly more than expected in January - to 1.1 per cent. This was the lowest level registered since July 1999, and a sharp drop from the 1.6 percent rate registered in December. On a month-to-month basis, prices dropped 0.8 percent. And if we come to look at the "core" inflation rate - that is consumer inflation without the volatile elements of food, energy, alcohol and tobacco, we find that it dropped by a very large 1.3% month on month in January. Indeed if we look at the core inflation rate over the last six months, the index has only risen 0.1% (or an annual rate of 0.2%). This gives us a much more accurate reading on where inflation actually is at this point in time, and where it is headed. If things continue like this, then the eurozone as a whole is headed straight into deflation, for sure, especially when the force of the economic contraction and the size of the consequent output gap are taken into account.


Problem Surfeit Or Architectural Deficit?

What is not totally clear at this point is whether the European Union is "overdetermined" (in terms of the problem set it faces) or "underdetermined" (in terms of the available instruments and institutional structures it disposes of for handling it). The Financial Times eurozone correspondent Wolfgang Munchau has been complaining bitterly of late - and with good reason - about the extraordinary narrow-mindedness of Europe’s economic and political leadership in the face of the current crisis, which reaches, as we have seen from Ireland in the West to Hungary in the East, and from Greece in the South to Sweden in the North. But more than narrow mindedness what we are faced with is innocence and inability to react, and frankly I am not sure which is worst. I say “innocence” because it is by now abundantly clear that many of Europe's leaders simply haven’t yet grasped the severity of the problems the continent faces (especially in Spain, or even Germany itself, let alone in the East), and I say inability to react, since we have always and forever been moving too little and too late. The initial response to the banking crisis last October was one clear example (where we saw a landshift-style volte face in the space of only one week) and the way we are now confronting the need to live up to the promises then made about guaranteeing the banking sector in individual countries which start to get into difficulty, and in particular the “systemic” banks, would be another.

The apparent confusion which currently reigns over at the ECB about whether or not the eurozone can operate some sort of US/Japanese style quantitative easing - the bank is at the present time "researching" its alternatives - would be a third.

But as our leaders are busy contemplating whether or how to bail-out entire nations, rather than simply individual banks, European government budget commitments steadily mount-up while their sovereign debt ratings start to buckle under the weight of a growing and deepening European recession.

As I keep flagging, sovereign bond and CDS spreads keep widening, and the gap between the interest rates Greece, Austria, Italy, Ireland and Spain must pay investors to borrow for 10 years and the rate charged Germany has risen to the widest since before they adopted the euro. Credit-default swaps on Ireland rose to a record on February 16, climbing to 378.4 points, while Greek credit-default swaps hit 270 points. The yield difference, or spread, between 10-year Austrian securities and benchmark German bunds has been rising substantially of late, and hit 137 points on Feb. 18, and Austria now has a higher default risk than those Mediterranean “laggards” like Italy, Portugal and Spain, at least according to credit-default swap prices as quoted by CMA Datavision. Austrian swaps were trading at 253.3 basis points on March 3, compared with 17.5 points 12 months ago.

Now ten years bad craftsmanship cannot be put straight in a day, but we are going to have to try. There is a path through to the sunlight, and we need to follow it, even if sometimes its hard to discern whether what we see before us is the light at the end of the tunnel, or the Brussel-Frankfurt express headed straight towards us.

The EU needs to remedy its institutional deficiencies in order to address its crisis overload problem. Fortunately there are remedies available. In the first place EU (rather than exclusively national) bonds can be created and these will effectively give us a central treasury. In the second place, and given the deflation problem, the ECB can now follow the Bank of England and enter a further stage of quantitative easing, expand its balance sheet and buying the EU bonds in the primary market, as the BoE is set to do with Gilts and as the BoJ did in the early years of this century. Thirdly, the rules of the Maastricht treaty can be rewritten to give rapid access to the eurozone to the highly vulnerable countries of the East, and, lastly, we can write a new pact, one with teeth to give us the ability to see through the deep seated structural reforms that so many of our economies badly need. Most importantly of all, the arrival of deflation is not only a threat, it is also a challenge, and one we can rise to. Money may not be the be all and end all of everything, but having it sometimes helps, and having the power, nay the need, to print money can give Europe's central administration one hell of a lot of clout should it need to use it. As Economy and Finance Commissioner Almunia said only last week "you would have to be crazy to want to leave the eurozone right now". Well that sure is one hell of a lot of leverage to have over people, if you know how to use it.

So while the first argument in favour of EU bonds may be an entirely pragmatic one, namely that it doesn’t make sense for subsidiary components of EU Inc. to be paying more to borrow their money when the credit guarantee of the parent entity can get it for them far cheaper, the longer term argument is that the ability to issue such bonds may well enable the EU Commission to become something it has long dreamed of becoming - an internal credit rating agency for EU national debt, since in the mid term the whole system of EU bonds can only work if it is backed by a very strong Lisbon type reform pact for those countries who apply to make use of the facility. This is what now needs to be worked on.

And how do we know that that there won’t be yet another round of backsliding on all this? Well we don’t, this is the risk we just have to take, but sometimes you do need to simply cross your fingers and jump, since the burning building behind you looks none to attractive either. But what we do know is that since there will now be a mechanism whereby the bad behaviour of the few really can penalise the many financially, then there really will be some meaningful incentive to generate a pact, this time, that really has teeth to stop that penalisation taking place.

The deficiencies in the institutional architecture to support the eurozone have long been known, and in particular the absence of a common treasury. The road to establishing the zone in the first place was tiresome, tortuous and long, the road to cleaning up the mess which has arisen as a result of these deficiencies will need to be nasty, brutish and short, or otherwise this is just what the life of the zone itself may well turn out to become.

ECB Corridor

December 19

• ECB has re-widened the rate corridor to 200bp effective on 21 January, reversing its 9 October decision. The move is an attempt to discourage the use of ECB’s deposit facility, revive bank lending, and help normalize money markets.

• The move is likely to lead to lower eonia rates and perhaps slightly lower euribor rates. But the effects are likely to be quite small. The widening of the rate corridor also puts pressure on the already hardpressed banking sector.

• We do not expect this initiative to revive bank lending, and are somewhat puzzled by ECB’s obsession with the amount on deposit, i.e. ECB would get much better results from proceeding with plans for a clearing house for interbank loans.

Fiddling while Rome burns Rate corridor re-widened to 200bp Yesterday the ECB announced that it will re-widen the corridor of standing facilities to 200bp effective from 21 January next year. This reverses ECB’s decision from 9 October last year when it reduced the corridor to 100bp. This means that the marginal lending rate will be 3.5% and the deposit rate 1.5% from 21 January (minus whatever ECB cuts on16 January). The ECB kept the weekly fixed rate tender procedure with the full allotment unchanged. So, unlimited liquidity is still in place.

Marginal lending is much less than earlier in the crisis, and the ECB’s decision is mainly aimed at reducing the amount in the deposit facility.





Massive amounts are deposited at the ECB facility, which is clearly bothering it. ECB’s aim is to encourage banks to increase lending in the economy and improve the functionality of money markets. The big question is whether it works.

The o/n eonia fixing is approximately 25bp lower than the refi rate at the moment. In more normal times eonia on average is slightly above the leading interest rate. The lowering of the deposit rate will probably lower the o/n Eonia fixing somewhat, and hence pull longer eonia rates lower in the process. This may also have a slightly positive effect on euribor rates, as a wider spread makes euribor slightly more interesting.



However, there are also effects pulling in the opposite direction. Namely, banks are being punished for using both the lending facility and most importantly the deposit facility, adding to the banking sector’s problems. This could lead to less liquidity being drawn in the ECB and hence less being placed on deposit. This would not have any positive effect despite lowering the amount on deposit. This does not solve much We are very aware of the money market problems and the importance of improving the credit dynamics in Euroland. But this initiative is not a big piece in the solution, i.e. in our view ECB would get much better results from going forward with plans for a clearing house for interbank loans. Should the widening of the rate corridor not significantly lower the amounts deposited at the ECB, further penalties could be in the pipeline. We believe the ECB will cut the refi rate by 50bp effective on 21 January as well. This will take the refi rate to 2%, the marginal lending rate to 3% and the deposit rate to 1%.




Eonia Swaps

With the advent of the Euro, the transformation of numerous national markets into a single currency market has provided an excellent opportunity for the development of new benchmarks such as the EURIBOR (unsecured) and EUREPO (secured) indices for the money market. This new environment led to an increasingly homogenous and integrated swap market in the euro area. The growth of the European swap market over the last seven years has also been accompanied by greater diversity in the range of actors using interest rate swaps.

The Euro OverNight Index Average or EONIA swap market was one of the most dramatically affected sectors within the financial markets. There has been a dynamic growth in the size of the EONIA swap market in recent years. Tight bidoffer spreads and increasingly high daily volumes have built the basis for a very liquid product. Electronic trading platforms have created even greater price transparency. According to the European Central Bank’s regular money market survey, total trading volume has almost tripled between 2000 and 2006. This sharp increase in volume and the fact that EONIA Swaps are the most liquid segment of the euro money market reflects the benchmark character the EONIA swap market plays within the euro money market derivative product range. Therefore EURIBOR ACI and the European Banking Federation (FBE) decided to introduce a new Index, the EONIA Swap Index. This new index was established on 20 June 2005, and will further stimulate the overnight index swap (OIS) swap market, with the development of new products derived from the EONIA Swap Index currently in progress.

What is an EONIA Swap?

An EONIA swap is similar to a plain vanilla interest rate swap transaction i.e. an exchange of a fixed rate interest cash flow for a variable rate cash flow or viceversa. In essence, one interest rate is received, while at the same time the other one is paid. That is, at the time an EONIA swap is concluded, the parties determine the payer and the receiver of the fixed interest rate, with the variable interest rate being exchanged in the opposite direction. Upon settlement, only the net cash flows are paid one business day after maturity. The nominal amount on which the interest payments are calculated is not exchanged. The diagram below illustrates the structure of an EONIA Swap. For example, a payer in an EONIA Swap transaction pays a fixed rate and receives a floating rate pegged to the daily EONIA setting.

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.