The ECB’s Lagarde deal was hard won, but the battle against the hawks has only just begun

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde this week negotiated a tough compromise to gain support for a new pandemic package, but her battle to win over skeptics among her colleagues and investors are just getting started.

FILE PHOTO: European Central Bank (ECB) President Christine Lagarde reacts as she addresses a press conference on the results of the Governing Council meeting, in Frankfurt, Germany, March 12 2020. REUTERS / Kai Pfaffenbach

The ECB has unveiled plans to buy an additional 500 billion euros in bonds and give banks even larger subsidies to keep credit in circulation, with the aim of supporting the eurozone economy until ‘at the expected end of the coronavirus epidemic.

The package, aimed at keeping borrowing costs low for governments, households and businesses, brings the ECB closer than ever to outright targeting of specific levels of bond yields and spreads, without saying so openly.

But conversations with five sources within or close to the ECB’s Governing Council suggest that the December 9-10 meeting was tense, and disagreements over the new round of bond buying began even before.

The ECB kicked off talks last week with an envelope of 750 billion euros for bond purchases, but reduced it to 500 billion euros before the meeting after being pushed back.

Still, chief economist Philip Lane’s scaled-down proposal nearly fell through at the meeting, with policymakers at odds over the economic outlook, the size of bond purchases and the terms of subsidized loans to banks.

Lagarde stepped in to orchestrate a deal on political tools, offering concessions to dissidents rather than dismissing them like his predecessor Mario Draghi did on occasion, the sources said.

In one case, Lagarde helped convince dissidents by pointing out that the envelope of 500 billion euros ($ 608 billion) would not need to be fully spent if financing conditions remained easy.

This reassured governors who wanted smaller debt purchases as bond yields are already languishing at record highs, spreads are tight and government papers are hard to come by in some smaller countries.

Lagarde also said the envelope could be increased. But that would require a new Governing Council decision, making the obstacle implicitly higher.

“It is no longer an envelope but a ceiling, a maximum amount,” 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 full amount.

Policymakers also disagreed over the size of longer-term Targeted Refinancing Operations (TLTROs), an increasingly controversial facility whereby banks are paid to borrow from the ECB as long as they don’t shrink their portfolios. of loans.

The political hawks were opposed to Philip Lane’s initial suggestion to increase the maximum amount that banks will be allowed to borrow from 50% to 60% of their eligible loans, but Lagarde managed to strike a compromise midway through. 55% path, the sources said.

In the end, the package was supported by a large majority.

A central bank spokesperson declined to comment on this story.

Speaking on Friday, Lithuanian central bank governor Vitas Vasiliauskas said he had reservations about providing too many additional stimulus measures, but was happy with the deal reached on Thursday.


Winning a deal on Thursday’s package, however, could prove to be the first of many challenges for the ECB president, who took office just over a year ago.

First, some skeptics of the deal maintained their reservations, claiming privately that it was an implicit form of “yield curve control” and that it had to end at the end of it. of the pandemic.

“Keeping spreads stable is a bad economy,” said one of the sources, saying market prices should be allowed to reflect economic fundamentals.

Even the TLTRO, until recently one of the ECB’s most consensual tools, is now becoming the target of criticism as it effectively subsidizes banks and eases the pressure on them to get back into shape or merge.

Second, by making bond purchases contingent on borrowing costs rather than committing to them no matter what, the ECB can invite markets to test its resolve.

This kind of tentative language had been a source of frequent criticism from the eurozone central bank at the onset of the 2010-12 debt crisis, but was swept aside by Mario Draghi soon after becoming president with his pledge. to do “whatever it takes”. to save the euro.

“Now that the market knows the commitment to the PEPP is low, expect it to challenge the resolve of the ECB as the data surprises on the upside and the hawks get louder,” said Marco Brancolini, economist at Nomura.

($ 1 = 0.8227 euros)

Reporting by Francesco Canepa, Balazs Koranyi and Frank Siebelt; Editing by Hugh Lawson

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