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Jun 21, 2012, 07.01 PM IST
Laurence Boone, Europe economist, BofA ML, says that she does not have big expectations from the upcoming ECB meeting.
Below is the edited transcript of her interview to CNBC-TV18. Also watch the accompanying video.
Q: What are your expecting form the upcoming ECB meeting and the EU Summit?
A: We don't have big expectations from this meeting. Topics like growth package, recapitalisation of the banking sector, expansion of the rescue mechanism set up by Europe, banking union and euro bond will be discussed in the meeting. However, we expect concrete results on a very small growth package of the order of 1% of the EU GDP. For the rest negotiation will be remain open, but there won’t be any fixed date or any concrete details.
Q: Do you feel that vulnerable bond segment like Spanish and Italian bonds could hit fresh highs in terms of yields next week after the EU Summit?
A: It depends on three things. First, how the loans to the banks is designed for Spain and whether it comes with condition, like strong EU monitoring over economic reforms that Spain has implemented in that case bond yields could come down. Second, if all the countries have ratified the successor to the current EU rescue mechanism then there is some hope that the ECB may act in the wake of this action. Third, if there is some decision beyond our expectation then the markets may regain confidence in the capacity of European to manage the crisis and that those bond yields come off, but it has a very low probability.
Q: Do you think something material can be delivered in the near-term or even lose talk by the policymakers should be able to comfort the markets?
A: Due to lack of concrete move in the short-term there is a risk that the market will be disappointed. Expectations of getting anything from Europe banking union or Euro bond is low. Most probably we will get a commitment to do something in the near future or a roadmap for the end of the year but nothing beyond that.
Q: Is the EU Summit's key takeaways disappointing as you mentioned because the demands are so tall and bond yields continue to climb, in that event is the likelihood of the ECB acting in the form of purchasing bonds, some form of an LTRO, some form of a bond purchase is that one of the events that the market is expecting?
A: The market might be expecting that, but I am not sure about what will be delivered. ECB purchases of bonds are quite inefficient as long as the ECB remains senior to other bond holder. The more the ECB buy the more pain will be taken by bond holder therefore we don’t think any big move from the ECB to buy bonds.
On LTRO front, the ECB is quite clear that banks have plenty of liquidity, all the banks are soverign and there is no liquidity problem in the euro zone and if some banks do have liquidity issues, it's either because they are not adequately capitalised or they are lacking collateral and neither of this problem can be solved by the LTRO.
If Spanish and Italian bond yields spiral up again, we would have to rely on governments to make a move, the ECB would do nothing more than a temporary action. Due to deteriorated economic outlook, we expect a rate cut in the next ECB meeting.
Q: The scope of a positive surprise from either policymakers or politicians looking very unlikely in the near-term at least in the next two-three weeks?
A: Yes, the scope of a positive surprise is very low, that's partly because the French and the German have not yet defined what would be their common goal and what they want to do with the future of the European Monetary Union.
May 21 2013, 13:56
- in Results Boardroom
May 21 2013, 11:05
- in MARKET OUTLOOK