Most important events today will be the press conference of the ECB

Today’s Comment

One of the most important events today will be the press conference of the ECB. We do not expect any changes in the interest rate or new signals about coming changes in the interest rate, but the reason why it is nevertheless worth keeping an eye on the press conference is, of course, that in no way has the crisis in Greece and the euro zone become less severe since the ECB’s April meeting. On the contrary, the crisis has escalated, and that has questioned the role of the ECB and its possibilities of taking action to put a damper on the turmoil. One of the options available to the ECB is reintroducing long-term repo auctions at fixed rates in order to ensure sufficient liquidity in the system. This may not, however, suffice really to do away with the uncertainty in the markets. Most likely purchases of government bonds in the market will have a stronger impact. Such a solution may be a bitter pill to swallow for several ECB members, and we do not expect this option to come into play at the ECB meeting today. If the turmoil in the markets escalate further (if, for instance, we see further pressure on Spanish government bonds), it may become the case.

Another event that the market will follow over the coming days is the election in the UK, and it has been a long time since a general election in the UK has been as thrilling as now. We expect initially that pound sterling will weaken for a short term if the election result in a hung parliament. If the government formation turns out to be fairly smooth, and the new parliament quickly begins to deal with the economic challenges, we assess there will be no marked movement. In our view, the most important threat to GBP is a development where the government formation is long in coming or if we have to have a second ballot. We do not think a second ballot is particularly likely but if such a scenario materialises, pound sterling may come under pressure. For the time being, we maintain our 1-month forecast at 87 for EUR/GBP to reflect the risk associated with the election. We still think that in the long term pound sterling offers potential that has not yet benefited from the economic improvement that we have seen after all.

ECB's Stark: We Are Closer To Phasing Out Stimulus

FRANKFURT -(Dow Jones)- The time for a tightening of monetary conditions in the euro zone is approaching, European Central Bank executive board member Juergen Stark said Tuesday.

"After extended discussions, we are moving closer to phasing out our liquidity measures, as not all of them will be needed to the same extent as in the past," Stark told a banking conference.

He noted that the revival of world trade, the rebuilding of inventories and the huge influence of fiscal and monetary policy stimulus measures had helped bring the global recession to an end, adding that "recent economic and financial information is encouraging."

Stark said that the most pressing need of the day is to remove moral hazard from financial markets, while ensuring that there is enough liquidity for "markets and solvent institutions" and that proper procedures are in place for resolving the insolvencies of systemically important financial institutions.

"The first line of defense is that market participants must be liable for their actions," Stark said, adding a heavy hint that this appeared not to be the case at present. "As yet, I have...not seen any significant change in the behavior of market participants," Stark said. He stressed that the record amount of liquidity created by central banks across the world in the wake of the 2008 financial crisis "mustn't sow the seeds of new imbalances."

Some analysts have expressed concern that the sharp rebound in equity and, especially, debt markets this year may be more due to excess liquidity, rather than any improvement in the fundamental value of those assets.

Stark also rejected the creation of an 'emergency fund' financed or co-financed by taxpayers to insure the financial system. At a recent meeting of the G-20 group of countries, U.K. Prime Minister Gordon Brown had suggested levying a tax on financial transactions to seed such a fund, but the proposal was resisted by the U.S. and others.

Stark also repeated his opinion that the ECB has no great need to change its approach to monetary policy, saying that its emphasis on monetary analysis had proved its worth. He also argued that the ECB doesn't need any new policy tools to maintain price stability in the future.

Web site: www.ecb.int

-By Geoffrey T. Smith, Dow Jones Newswires (+49 160) 743 40 90; geoffrey.smith@dowjones.com

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(END) Dow Jones Newswires

November 17, 2009 11:39 ET (16:39 GMT)


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