Following are excerpts from a CNBC interview with Julia Chatterley and Moritz Kraemer, Chief Rating Officer, Sovereign Ratings at Standard & Poor's.
JC: What are you expecting from the ECB today?
MK: Well, I think they're going to move. I think that's pretty clear. So the expectation would be for the deposit rate to go down further and if the deposit rate drops further by 10 or 20 basis points, of course, it broadens the universe of assets that the ECB can buy.
I think that's quite likely to happen in tandem. You have some increase in the QE at the end of a loop, maybe extending the period, maybe extending the monthly purchases and you might also have something on the ???, right? On the long term liquidity provision for the banks, so that the actual intend which is to get credit going again, can be further promoted.
JC: If we look at the likes of Denmark and you look at Switzerland and you're going to -0.75 basis points, so a negative deposit rate. Initially you saw credit growth and now actually we're seeing credit decline. I assume in some way that could be because they're now parting on the cost of consumers. Is a tipping point that's reached. So, is the ECB very conscious of this when they look at deposit rates and you think we get talk of tearing today?
MK: Well, the tearing is a bit of an odd concept, really. Because you try to do two things at the same time. You try to create sort of a stimulus by enticing the banks to lend more because it's less attractive just to hold the money with the ECB behind us, but at the same time is like, well, just a little bit maybe.
So it's like you're putting your foot on the gas pedal and on the brake at the same time. So, of course, it would help the banks with their problems that they currently have with the negative interest rates which has caused itching into profitability, although it wouldn't ??? that effect at this point.
But at the same time, it blunts the instrument that the QE and the negative deposit rate actually is, which is to try to create this portfolio rebalancing, move money out of liquidity into credit of the real economy.
So, you try to have it both ways. I don't think this is particularly powerful. The BoJ did it. I don't think the effect has been very convincing.
JC: Why do you think? Actually, that's a really interesting point to contrast the reaction, particularly that we saw in the markets when Japan decided to not only go negative deposit rates but also the tearing effect versus the ECB. Why do you think the market was so distraught in a sense, that Japan had gone for that option?
MK: I think in Japan, part of the hope was that, this would also contribute to arrest the rise in the yen. That worked for a very brief period of time and then the yen did what it did before which is rising.
And also, you didn't really see a sort of relief rally of something which was sustained on the banks stocks, on the banks securities, so I don't think this was a powerful instrument. I mean we are at a situation where monetary policy, works not very well.
We're at the zero bar, we're below the zero bar, so that means that you really need to engage in big numbers to make a difference because it is at a point where monetary policy is powerless. That's why we're here.
JC: You've got to be creative… I want to move on and talk to you about China. We've just come of the back of the NPC from China. Yet again, we hear from them that they're targeting 6.5 to 7% growth. Is that credible?
MK: Well, they can generate that in the short term. But they can only generate that if they sort of add one stimulus after the other but a fiscal and monetary by creating more credit.
But China, not the government, but China as a society is highly indebted already, so the overall debt ratio, all in, is comparable to that of the US, which a much more developed economy. So, at some point, this strategy will have to give way to something else. And I believe the way forward would be just to be less precise instead of broader ranges of targets. Or expectations rather than targets and that would allow to idle down the growth rate to something more sustainable because , what we're seeing in recent years is that, you've required more and more investment to generate lower and lower growth rates.
So this is not a model for the long term.
JC: So when they say: look we are going to hit at a minimum 6.5%, you believe them but you think actually they're going o have to throw a lot of stimulus, and increasing amounts of stimulus to achieve it, or do think actually, I'm not sure I believe that number?
MK: Well, you know I don't want to go in that debate, how reliable the numbers are. The only official numbers that we have are the official numbers, right? So, there's a lot of estimates out there in the market with what other observers think the real underline growth rate would be.
I don't want to go into that debate but what I would say is that if you try to generate higher growth today, it's as if you're mortgaging the future because, at some point, the leveraging has to stop and has to probably unwind to certain extent and then that will be payback time and then, the growth impact might be even more negative. We've seen it, we've seen it in the Eurozone, we've seen it in the US, I mean, it's not new.
JC: No, it's not a new lesson… I want to talk about the oil price because clearly that's filtering into the forecast that we're going to get from the ECB later. Critical factor as well for the GCC countries which a lot of the rating agencies are looking at and cautious about it in terms of their spending in particular, but we've seen a big spike ??? a pullback in the oil price, incredibly volatile. What point do you go: hang on a second, we need to rethink once again the sort of adjustments that we've made to our forecasts for those countries.
MK: Well, we have forecasts of a mild recovery in the oil price. I think what we've seen so far is well within that projection. But it sounds big you know, 5% increase in the oil price… but look at the absolute numbers, I mean, many of the public finances in the Gulf, for example, they're calibrated for oil prices between 80 and 110 depending which country you look at. So we're inching towards 40, so we're still a long way off. So the adjustment pressure is still very big and that's the reason why we have, last year and again last month, so lower the number of ratings including Saudi Arabia.
So the point is don't look at the percentage terms, look at the absolute value before you get excited… Look at how much they need to run their economic problem.