ECB poised to exit stimulus in a decade

Bloomberg

A decade ago, the European Central Bank took its first step to becoming the euro area’s firefighter-in-chief.
Its $112 billion emergency loan to banks on Aug. 9, 2007, was the initial response to a financial crisis that would force the Frankfurt-based institution to expand its balance sheet by trillions of euros. The ECB — together with international peers such as the Federal Reserve and the Bank of England — took centre stage in an unprecedented battle against bank
failures, recessions and sovereign-debt turmoil that changed the economic landscape and forced a complete rethink of what monetary policy can do.
The ECB’s job was additionally hampered by an incomplete currency zone weighed down by infighting and paralysis. But with the recovery finally holding up after years of stimulus and hard-fought economic reforms, central bankers have started to contemplate a return to more normal policies. One of many milestones on that path is expected in the fall, when ECB President Mario Draghi may offer an outline of a gradual exit from a 2.3 trillion euro bond-buying plan.
“The ECB has literally thrown the kitchen sink at the crisis,” said James Nixon, a former economist at the central bank, who now works for Oxford Economics in London.
“They are deep, deep into non-standard monetary policy, and getting back from there is a process that’s going to take a decade. It’s going to be extraordinarily protracted.”
Ten years ago, ECB President Jean-Claude Trichet was in St. Malo, northwest France, for a sailing holiday when the US subprime crisis reached Europe in full swing, forcing French bank BNP Paribas SA to halt withdrawals from three investment funds. Using faxes and telephones, he and his colleagues crafted the central bank’s response — a statement that officials were monitoring money-market tensions, followed by a pledge to lend financial institutions as much money overnight as they asked for.
Demand for the so-called fine-tuning operation exceeded the 69.3 billion euros given on the day after the Sept. 11 terror attacks. The ECB made three similar offerings in the days through Aug. 14.
Ten years on, as the world’s central banks slowly unwind the unprecedented stimulus their economies came to rely on, the ECB is a different institution. Policy makers of the old school have been replaced by a new generation, Trichet’s insistence to never pre-commit gave way to Draghi’s forward guidance, and the Governing Council’s remit was expanded to include banking supervision.