Following the dismal failure of Draghi's OpEd this morning (which we assume was a reprint of his much-anticipated - and now cancelled - speech from J-Hole) to jawbone anything but a very brief pop in EURUSD, we thought it useful to aggregate all the great-and-good deeds the ECB elder is considering (and why). Europe remains in a long-term deleveraging phase (as much of the developed world finds itself). This lack-of-demand for credit has crushed the so-called 'money-multiplier in Europe, just as it did in the US (which we discussed in detail here as worse than the Depression [5]); as banks have simply stockpiled the vast sums of LTRO/ECB-collateralized funds. This has left him feeling less than his normal omnipotent self and so he is forced to act even more extremely (or talk about acting that way). The following matrix from Morgan Stanley outlines his policy options under various scenarios as we note few (aside from a rate cut) are actionable in the short-term, and even fewer are likely to make any difference to this long-term deleveraging-cycle.
Via Morgan Stanley - European Loans & Deposits Tracker
While we may have avoided a broad credit crunch, the ‘Great Deleveraging’ in Europe seems far from over; history suggests that European banks have a long way to go and the LTRO will slow but not stop the process. European banks will continue to de-globalise, in our view. We think that European banks could deleverage by €1.5-2.5tr over the next 18 months, but history suggests that, over a longer timeframe – say, 5-6 years – this could reach €4.5tr assuming zero deposit growth.
[6]
But lending continued to slow in June. A money multiplier at record lows implies that banks are still stockpiling LTRO funds (and as Draghi noted - the transmission mechanism is not working)...
[7]
...and so ahead of next Thursday’s ECB meeting, we expect the Governing Council will cut the refi rate by 25bp to 0.5% and the depo rate to -0.25%.
Below, we summarise all the policy options at the disposal of the ECB.
At this stage, we don’t expect another 3Y LTRO, a further widening of the collateral pool nor an immediate commencement of the bond purchase programme announced in August.
Charts: Morgan Stanley