ECB moves away from unblocking lending

Two blocks away from the European Central Bank’s headquarters in Frankfurt, the words “No Troika” are painted defiantly across scaffolding. The graffiti is a stark reminder of the protests that took place barely a week ago outside the ECB headquarters.

Yesterday, there was no hint of the recent tensions as the imperturbable Mario Draghi took to the podium with his usual poise.

As expected, the governing council opted to keep interest rates at 0.5 per cent. Following last month's quarter of a percentage point cut – the first in 10 months – the prospect of a further cut so soon seemed doubtful, while recent economic data including better-than-expected industrial production figures this week, lessened the case for fresh stimulus. While the pressure may have been off in terms of interest rate changes, attention has been increasingly turning to other non-standard measures open to the European Central Bank. Access to finance for SMEs is emerging as a major problem across the euro zone, with the problem being felt more acutely in areas such as Spain and Italy most in need of economic stimulus.

Credit
Mr Draghi again mentioned the "fragmentation of euro area credit markets" yesterday, underlining the need to ensure transmission of monetary policy, but refrained from announcing any new measures.

While measures including the easing of collateral rules and the stimulation of the asset-backed securities market are under discussion, they remain "on the shelf", he said, and strictly not for short-term use. ECB vice-president Vitor Constancio had hinted as much last week when he said that one should not "overblow" the ECB's options when it comes to repairing the market for asset-backed securities.

As the ECB moves away from offering a substantial proposal to unblock lending channels, it may fall to member states at a European Council and bilateral level to address the sme issue.

Last Friday, European Council president Herman Van Rompuy suggested a joint proposal with the European Investment Bank to improve SME financing is imminent, while Germany and Spain signed a bilateral agreement which will see Germany lend billions to Spanish SME's at German rates.

Success
ECB president Mario Draghi also took the opportunity to reiterate the success of the bank's Outright Monetary Transactions (OMT) programme of purchasing national debt in secondary bond markets ahead of next week's decision by the German constitutional court on the legality of the scheme.

The hearing in Karlsruhe is likely to cast the closest eye yet on the legal underpinnings and mechanisms of one of the ECB’s most important policy responses to the euro zone crisis.