Monetary policy: nebulous but powerful - ECB names itself the savior of Europe

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Former US Federal Reserve Chairman Alan Greenspan was known as the Fed's Oracle.

His statements were cloudy and left a lot of room for interpretation.

If Greenspan had followed Christine Lagarde's performance on Thursday, he would certainly have been proud.

The President of the European Central Bank (ECB), like the former maestro, was also oracular and left many observers confused.

Lagarde managed to answer a question for ten minutes right at the beginning of the press conference without really providing clarity.

She even apologized for a certain confusion, only to answer in the best Greenspanian sense that the ECB's policy with the pandemic purchase program can only work if it is flexible.

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But despite the cloudy speech, Lagarde had a powerful message ready for everyone who listened carefully: The ECB would do everything to ensure favorable financing conditions in the euro zone.

In plain language: the monetary authorities will not let the markets crash and they will not allow investors to bet against individual euro countries and drive their returns up.

Source: WORLD infographic

"It was kind of a hidden whatever-it-takes moment," commented Alessio De Longis, fund manager at Invesco Investment Solutions.

Lagarde had made it public for the first time that the ECB's monetary policy not only focused on bank lending, but also on interest rate premiums for companies and government bond yields.

In case of doubt, the monetary authorities would intervene in the markets with injections of liquidity and buy bonds to ensure this.

"The ECB has made it clear to investors that it is not worth speculating against the central bank," said De Longis.

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It was recently noticed that the bond markets had hardly reacted to the political turmoil in Italy.

The risk premiums of ten-year Italian government bonds over government bonds had only risen slightly.

In previous crises, the bond markets had reacted much more allergically to adversity in Rome.

But Lagarde didn't really want to respond to direct inquiries about Italy.

She much preferred to use many words to keep the new strategy vague.

The ECB ensures favorable financing conditions, but it does not measure these conditions with a single indicator.

“We are pursuing a holistic approach.” The Bloomberg news agency, citing informed persons, reported that the ECB had targets for the spread of government bond yields between the strongest and weakest countries.

Lagarde admitted that government bond yields are an important benchmark, but said at the same time that the ECB is also paying attention to lending rates and conditions for companies and individuals.

"Of course, government bond yields play an important role as the basis for the conditions of credit for the economy. At the moment we do not see that the development of any particular yield poses a problem for the financing conditions of the entire euro area."

Nebulous prospects

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Almost the entire one-hour press conference revolved around financing conditions that the ECB wants to see designed "advantageously" in the future.

The ECB does not necessarily have to fully exhaust the volume of the pandemic program of 1.8 trillion euros.

But it could just as well be that the program will be further adapted, i.e. expanded.

It was also fitting that Lagarde kept the economic outlook hazy.

Although there are still economic risks for the euro zone, they would have lost some of their horror, even if the pandemic continued to rage.

The lockdowns all over Europe would certainly have a negative impact on the first quarter, but the forecast for the year as a whole does not have to be shaken yet.

“I wish I was cautiously optimistic.

But I'm old enough now to be realistic, ”said Lagarde when asked.

In fact, the fully comprehensive strategy that the ECB is pursuing with its interventions is not without its risks.

Because also legally, the ECB is moving on critical territory.

"This could give the impression that the ECB actually operates monetary state financing," said Katharina Utermöhl, an economist at Allianz, of the financial service Bloomberg.

Commerzbank chief economist Jörg Krämer does not believe Lagarde that the ECB is pursuing a "holistic approach" when assessing financing conditions in the euro area.

“In fact, the ECB should be primarily concerned with limiting the yield premiums on the bonds of the particularly highly indebted countries,” wrote Krämer in a comment on Lagarde's press conference after the ECB Council meeting.

According to Krämer, it can be observed that the ECB always buys more government bonds as part of its PEPP program when the risk premiums rise.

"Apparently, the ECB sees it as its task to hold the monetary union together as long as the heavily indebted states do not do their housework and thus latently endanger the existence of the monetary union," said Krämer.

The former US Federal Reserve Chairman Greenspan had already pursued a similar strategy with a virtuoso view of the stock markets. Whenever the stock market crashed, the man with the big glasses rushed to help. In the markets today there is still talk of Greenspan Put, or Greenspan insurance. In terms of bond yields in the euro zone, the Lagarde put could now be born.