The ECB left rates unchanged as widely expected. On balance, given that the risks to growth are still on the downside and that inflation is strongly anchored, there is a chance that the ECB will cut rates down the road, but only, we believe, if growth disappoints, which looks unlikely for now.
This month, the most interesting part of the press releases related to the situation in Cyprus, namely what to do when a financial institution gets into trouble. President Draghi stressed that that Cyprus is no template for future support programmes. But he also said that by itself shareholder/depositor haircuts (i.e. losing part of their money) is not a problem, the problem lies in the lack of ex-ante rules. The European Commission is drafting a proposal for these situations that includes a pecking order for the agents called to bail-in (i.e., who should lose money first in case of bankruptcy) and Draghi stressed that uninsured deposits should be the last called on a bail-in. Draghi recommended countries with outsized banking sectors to run the financial system and their public finances much more conservatively than other countries. He concluded that the Eurozone has to be able to solve problems in financial system without taxpayers’ money and without disruption to payments’ system.
Overall it was an interesting discussion on what lessons have been learnt with Cyprus and how the EA can act to avoid disorderly bail-ins in the future.