ECB: A revolutionary idea to revitalize the European economy with cheap loans to SMEs

Mario Draghi, President of the European Central Bank, delivering a speech at the European Parliament. (EP Audiovisual Services).

Mario Draghi, President of the European Central Bank, delivering a speech at the European Parliament. (EP Audiovisual Services).

IMF and World Bank’s spring meetings in Washington DC last weekend gave the opportunity to the European Central Bank (ECB), supported by the Bank of England (BoE), to launch a new monetary policy ‘offensive’ in order to revive the stagnant European economy. Mario Draghi, President of ECB clearly stated that the Eurozone’s central bank will provide “further stimulus” for the economy, if inflation remains at its present dangerously low levels of 0.5%, away from the target which has been set below but close to 2%. He also stressed that for the first time the ECB may target the parity of the euro vis-à-vis the other major currencies. During the past months the external value of the single currency has risen to very high levels, debilitating both the inflation rate and the economic activities in the euro area. There is more groundbreaking news though.

The ECB and the Bank of England in a rare occasion, presented a joint paper entitled, “The revitalisation of the European securitisation market”, aimed at helping the European SMEs. The two major European central banks stress that this financial instrument (securitization) can complement other long-term wholesale funding sources for the real economy, including for small and medium-sized enterprises (SMEs). This is the first time that the two central European banks show such a vivid interest in SMEs financing. Seemingly, the financial conditions in Europe must have developed so adversely during the past few months, as to make possible a catastrophic return to recession.

ECB and BoE join forces

The idea is that in a transparent and prudent way, overseen by the European monetary and banking authorities, the EU lenders can put together their prime quality loans and securitise them. Then according to the ECB’s plan “connecting SME financing needs with the funds of bank and non-bank investors via securitisation of SME loans can assist banks’ ability to fund and distribute risk. Both channels have the advantage of not interfering with the allocation mechanism of a market economy”.

In this way prime quality Asset Backed Securities (ABSs) could be bought by long-term investors, like insurance companies and pension funds, and thus refinance the lenders and the lenders in their turn accord more loans to SMEs. The key to this new cycle of funding, aimed at financing the real economy and more particularly the SMEs, is the bank Asset Quality Review to be effectuated by the ECB. Only after the ECB and the other EU banking authorities have ‘sealed’ those securities, the loan-securitisation-loan cycle can progress based on solid and prudent steps.

New financial instruments for SMEs

The European Sting noticed last week that something important was jointly prepared by the ECB and the Bank of England, aimed at helping the SMEs. Last Tuesday the Sting noted that Yves Mersch, Member of the Executive Board of the ECB, spoke at the Deutsche Boerse – Clearstream ‘Exchange of Ideas’ event, in London. On this occasion he proposed ways and means to revitalize the anemic ABSs market and he concluded “It is not too late to change course: not all EU securitisations deserve the stigma attached to them for the past few years. There is a need to restore coherence across financial sectors in particular amid the unfavourable regulatory treatment of (high quality) securitisation instruments, without violating prudential principles. By doing so we must act fast and in a manner that is sensitive to our own European reality. If the Bank of England and the ECB were to put forward a joint statement on this issue at the forthcoming IMF Spring Meetings, it would underline the European determination to decisively move forward”.

This was exactly the announcement three days later the ECB and the Bank of England jointly produced during the IMF – World Bank’s Spring Meetings in Washington. Obviously Mersch knew about the new policy option and took the precautions to inform the capital markets that Europe will go for it. It’s a revelation to see the ECB and the Bank of England to jointly undertake painstaking efforts in order to help the real European economy and more so the SMEs.

The expensive euro leads to deflation

However Draghi had more to say last weekend in Washington. Given that the ECB’s basic interest rates are already zeroed or close to zero, the extraordinary monetary measures can only rely on the money printing machine. Reportedly the central bank is currently studying the tools to be used in this direction. The forms the monetary easing can take are not many though. The most important of them are the relaxation of the terms under which the lenders are refinanced by the ECB on collaterals, and the straight forward acquisition of bonds in the secondary market.

Now the ECB and the BoE propose a new way of refinancing the real economy through the restoration of the ABSs market under the guidance of the monetary and banking authorities. Nevertheless in all those cases the common denominator is that the ECB will either print money or issue guarantees for ABSs, which is tantamount with possible future money printing.

Draghi’s commitment

The problem is though that the Treaty of Maastricht restricts ECB’s mandate exclusively in taking care of the inflation rate; nothing else. This said, a lot of people, particularly in Germany, are ready to challenge at the European court rooms the new policies applied by Draghi. In view of that the President of ECB noted from Washington that, “The rise of the single currency’s exchange rate is one of the main reasons eurozone inflation is at a dangerously low 0.5%”. Then he added “a stronger euro would act as a trigger to looser monetary policy”. By this Draghi is directly connecting his new extraordinary monetary measures with the dangerously falling inflation rate, an issue right within ECB’s mandate.

It’s quite clear then, that the latest and quite out of the ordinary joint announcement by ECB and the Bank of England is a strong indication of the direction those extraordinary measures are bound to take. In any case the target will be to facilitate the financing of the SMEs, through more loans from the banking system. Not to forget that the small business cannot address themselves directly to the capital markets for financing.

All in all the ECB, backed by the Bank of England, is certainly opening the way to a new financial environment in the euro area, designed to revive the real economy through ample and cheap bank loans to the SMEs. The banking system of Eurozone as it stands now is quite incapable of financing the real economy. That’s why the ECB is planning these new policy lines, in order to save Eurozone from a new stagnation or even recession period.

 

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

G20 LIVE: “Our response needs to be robust…otherwise we will only find the fire we are trying to put out”, UN Secretary General Ban Ki-moon just lit up G20 in Antalya Turkey

China revisited by the former Ambassador of Hungary to China

Latin America is a mass-transit powerhouse. But it needs fine-tuning

This NATO experiment used fake Facebook accounts to trick soldiers into sharing sensitive information

Nordic noir: The unhappiness epidemic affecting young people in the world’s happiest countries

Ebola Outbreak in Democratic Republic Congo is ‘largely contained’: WHO

Eurozone: The crisis hit countries are again subsidizing the German and French banks

In Marrakech, UN chief urges world leaders to ‘breathe life’ into historic global migration pact

ILO: Progress on gender equality at work remains inadequate

EU–Canada Summit: strengthening the rules-based international order

Vegans in France are using extreme tactics to stop people eating meat

Following the World Cup? Then you’re watching high-performing migrants at work

JADE Team at the European Business Summit 2017

What Mary Poppins teaches us about behavioural economics

The creation and maintenance of smoke-free public spaces in the UK

MEPs adopted measures to reconcile work and family life

Although Greece is struggling to pay salaries and pensions Varoufakis is “optimistic”; the Sting reports live from EBS 2015

“Asia-Pacific takes stock of ambitious development targets”, written by the Heads of UNFPA and ESCAP

YO!FEST ENGAGES 8,000 YOUNG EUROPEANS IN FUTURE OF EU

Ηealth’s foundation is falling apart: what can we do about it?

MEPs want robust EU cyber defence and closer ties with NATO

Secretary-General repeats call for support to Lake Chad countries after latest Boko Haram attack

Czech Babis, Austrian Kurz and others threaten Europe with nationalist populism

Meet the robot fighting back against coral reef destruction

rescEU assets mobilised to help Greece fight devastating forest fires

Commission celebrates the 30th anniversary of the Jean Monnet Activities promoting European studies worldwide

Soil pollution ‘jeopardizing’ life on Earth, UN agency warns on World Day

US resolution to condemn activities of Hamas voted down in General Assembly

Sign language protects ‘linguistic identity and cultural diversity’ of all users, says UN chief

UN Security Council welcomes results of Mali’s presidential elections

More bank bailouts at taxpayers’ expenses

Across the world, women outlive men. This is why

How Hawaii plans to be the first US state to run entirely on clean energy

The influence of the multilateral agreement on migrant health

Attack on UN compound in Somalia may be ‘violation of international humanitarian law’

New UN Global Climate report ‘another strong wake-up call’ over global warming: Guterres

There is no greater sorrow on earth than the loss of one’s native land

Terror attacks strike people ‘from all walks of life, the UN included’

UN Security Council offers Yemen Special Envoy ‘their full support’

Two shipwrecks add to ‘alarming increase’ in migrant deaths off Libya coast: IOM

Only the Americans are unhappy with the ceasefire agreement in eastern Ukraine

These Indian fishermen take plastic out of the sea and use it to build roads

These EU countries have the most government debt

The fatal consequences of troika’s blind austerity policy

ISIS fighters fleeing Mosul for Syria can topple Assad. Why did the US now decide to uproot them from Iraq?

France fails again the exams. Kindly requested to sit in on Commission’s class

Main results of EU-Japan summit: Tokyo, 17/07/2018

Poverty data never tells the whole story

The results of Finland’s basic income experiment are in. Is it working?

Forty-two countries adopt new OECD Principles on Artificial Intelligence

When connectivity is not enough: the key to meaningful digital inclusion

Mobile young people create the European labour market of tomorrow

October’s EU strong digital mix: From Safe Harbour to Net Neutrality, Roaming and Snowden

Why income inequality is bad for the climate

5 things you need to know about water

3 strategies for Africa to thrive in this new era of globalization

Ebola fight ongoing amid evidence of ‘several massacres’ in DR Congo’s Ituri province

‘Unlock opportunities’ and pave the way for sustainable development, UN chief urges on World Population Day

Giving humanitarian help to migrants should not be a crime, say MEPs

WhatsApp to face scrutiny from EU regulators task force over data sharing with Facebook

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s