Mario Draghi proved last week that the European Central Bank is the only Eurozone institution catering for the entire single money area and not only for part of it. The announcement last week of the details of the new asset-backed securities purchases and covered bond acquisitions programmes, which include Greece and Cyprus under conditions, proves that the ECB insists at transmitting its monetary policies to all of its 18 member states despite the strong reactions from Germany.
The ECB governor, when asked if those two countries, which have not yet managed to exit from the danger area, will be eligible for the programmes he answered, “we have decided to include countries that have a rating below BBB”. He went on to clarify that the asset backed securities purchases in the two countries will be thoroughly scrutinised so as “there would be risk-equivalent to assets bought elsewhere”. ECB won’t be buying any government bonds though, as all the other major central banks do, giving to its action the relatively modest character of a restricted monetary ‘quantitative easing’.
Starting this month
ECB will start buying covered bonds this month and ABSs (asset backed securities) later on in the year. The programmes will have a span of at least two years. Covered bonds are assets backed by government guarantees or mortgages. ABSs are securitised loans. In this case the eligible ABSs will be prime quality loans to small and medium sized enterprises and ECB will vie to make sure that the money handed out to banks with those purchases will be used to grant more loans to SMEs.
It’s not clear how much new money the ECB will print to buy covered bonds and ABSs from Eurozone banks. Draghi explained that the two new programmes together with the Targeted Long Term Refinancing Operations decided last June will have a sizeable effect on ECB’s balance sheet. Experts estimate that all three actions will be of a value of at least €1tn. Obviously, the targets of all the new three monetary tools are to revive the euro area economy, bring inflation closer to the institutionally set benchmark of close but below 2%, from 0.3% in September.
A cheaper euro
By the same token the new action will arrest the long term tendency of the euro parity to increase in relation to the other major currencies, and particularly the American dollar. Already the announcement of the TLTROs last June and the expectations of the covered bonds and ABSs purchases programmes have worked their way through. The parity of euro with the dollar fell from 1.32 at the beginning of last summer to 1.26 presently. Understandably, a cheaper euro will help home production of goods and services to increase and provide more jobs and incomes. This will be done by making imported goods dearer and exported goods more competitive.
The timing of ECB’s announcements was most appropriate. The quite fragile and uneven economic recovery of euro area has weakened further during the past few months and the euro area appears to be losing an already frail growth momentum. Inflation fell further in September to 0.3% from 0.4% in August. The economic climate in Europe has also deteriorated as a result of the on-going civil war in Ukraine, without a visible and sustainable solution appearing in the horizon there. As a result, the geopolitical risks impede investments and make consumers more careful with their spending. Both those facts are bound to overturn the flimsy growth prospects of Eurozone and send it to a downward path.
More jobs to be lost?
The first signs that the weak growth in the euro area may soon become a fully-fledged recession came last week. According to Markit, the statistical data firm, the monthly composite purchasing managers index – which measures economic activity in manufacturing and services – fell to 52.0 in September from 52.5 in August, lower than the initial estimate of 52.3. Markit’s index for manufacturing (Purchasing Managers Index – PMI) in Germany was found at 49.9 also in September from 50.3 in the previous month. Measurements below 50 are signalling contraction.
Despite all that, the strongest criticism for ECB’s monetary action to help revive euro area economy came from Germany. Conservative politicians from Bavaria accused Mario Draghi of transforming ECB into a ‘bad bank’. Bad banks are a kind of black hole financial entities created by governments. They absorb the toxic assets from the banking industry, thus subsidising bankers with billions to restart their unholy activities, betting other people’s money in every conceivable and risky market.
The double German standards
Those German dignitaries from Bavaria forget that back in the early crisis years, ECB bought a round sum of about €180 billion of government bonds from banks in Ireland, Spain, Greece, Italy and Portugal. The aim of those operations was not only to save those countries from bankruptcy, but also rescue their lenders in Germany and France. In this way some major German and French banks were saved at the expenses of poor taxpayers in those countries.
ECB’s bond purchases from those countries are now regularly redeemed with money extracted from impoverished Greeks, Irish, Italian, Spanish and Portuguese taxpayers. German taxpayers have even gained something out of those transactions. Bavarian politicians didn’t complain in 2010 – 2012.
It’s quite incomprehensible how selfishly some members of the German political and economic elite act and react. Berlin, back in 2010 and 2012 has also saved some crumbling banks in the country, even without clearance from EU’s competition authorities. In this way Germany disrespected not only EU’s fair competition rules but also the strict state aid legislation. Luckily the almost mindless reaction to ECB’s new monetary programmes is not shared by the totality of the German politico-economic elite.
In any case Mario Draghi has made it clear by now that for as long as he is at the helm of Eurozone’s central bank, monetary policy will be for the entirely of euro area, focusing on the crisis stricken countries and reaching the boundaries of its mandate.