© Reuters. The President of the European Central Bank (ECB), Christine Lagarde, reacts to a press conference on the results of the meeting of the Governing Council in Frankfurt
By Francesco Canepa, Balazs Koranyi and Frank Siebelt
FRANKFURT (Reuters) – The President of the European Central Bank, Christine Lagarde, reached a tough compromise this week to secure support for a new package of measures to fight pandemics. However, their struggle to convince the skeptics among their colleagues and investors has only just begun.
The ECB announced plans to buy more half a trillion euros in bonds and to provide even larger subsidies to banks to keep credit flowing to support the eurozone economy until the expected end of the coronavirus outbreak.
The package, which aims to keep the cost of borrowing low for governments, households and businesses, brings the ECB closer than ever to directing without being outspoken about specific levels of bond yields and spreads.
However, conversations with five sources on or near the Governing Council suggest that the December 9-10 meeting was tense and that disagreements had already started over the new round of bond purchases.
The ECB had started talks last week with an envelope of 750 billion euros for bond purchases, but cut it to 500 billion euros before the meeting after receiving the pushback.
Still, chief economist Philip Lane's pared-down proposal came to a head at the meeting when policymakers disagreed on the economic outlook, the size of bond purchases and the terms of subsidized bank loans.
Lagarde intervened to reach an agreement on the political instruments and offered concessions to dissenters instead of occasionally withdrawing them from circulation like her predecessor Mario Draghi.
In one case, Lagarde helped persuade dissidents by emphasizing that the € 500 billion ($ 608 billion) envelope would not have to be spent in full if funding terms remained simple.
That reassured governors who wanted smaller debt purchases than bond yields are already at record lows, spreads are tight, and hard-to-find government papers are hard-to-find in some smaller countries.
Lagarde also said the envelope could be enlarged. However, this would require a new decision by the Governing Council, which implicitly raises the hurdle.
"It's no longer an envelope, but a blanket, a cap," said one of the sources.
Austrian central bank governor Robert Holzmann also said on Friday that he did not expect the ECB to use the entire amount.
Policy makers also disagreed on the size of the Targeted Longer Term Refinance Operations (TLTRO), an increasingly controversial facility that pays banks for loans from the ECB as long as they don't shrink their loan books.
Political hawks opposed Philip Lane's original proposal to increase the maximum amount banks can borrow from 50% to 60% of their eligible loans, but Lagarde managed to strike a halfway compromise at 55%.
In the end, the package was supported by a large majority.
A central bank spokesman declined to comment on the story.
Central Bank of Lithuania Governor Vitas Vasiliauskas said Friday that he had reservations about too many additional incentives but was satisfied with the deal renewed on Thursday.
THE END OF THE BEGINNING?
However, the agreement on Thursday's package could be the first of many challenges for the ECB president, who started work just over a year ago.
First, some skeptics of the deal held onto their reservations, saying privately that it was an implicit form of "yield curve control" and should end once the pandemic was over.
"Keeping spreads stable is a bad economy," said one of the sources, arguing that market prices must reflect economic fundamentals.
Even TLTRO, until recently one of the most consensual instruments of the ECB, is now becoming a target of criticism as it effectively subsidizes banks and reduces pressure on them to get back in shape or to band together.
Second, the ECB can invite markets to test their determination by making bond purchases based on the cost of borrowing, rather than obliging them to do whatever happens.
This kind of tentative language had been a source of frequent criticism of the eurozone central bank at the start of the 2010-12 debt crisis, but was brushed aside by Mario Draghi shortly after he became president and promised to "do whatever it takes." ". save the euro.
"Now that the market knows that exposure to PEPP is low, it should question the ECB's resolve as the upward data surprise and the hawks get louder," said Marco Brancolini, an economist at Nomura.
($ 1 = 0.8227 euros)