ECB’s new money bonanza handed out to help the real economy or create new bubbles?

Discussion between Mario Draghi, President of the European Central Bank (ECB), on the right, and Jean-Claude Juncker. Prsident of the European Commission. Location: Brussels - Council/Justus Lipsius. © European Union, 2015 / Source: EC - Audiovisual Service / Photo: Etienne Ansotte.

Discussion between Mario Draghi, President of the European Central Bank (ECB), on the right, and Jean-Claude Juncker, Prsident of the European Commission. Location: Brussels – Council/Justus Lipsius. © European Union, 2015 / Source: EC – Audiovisual Service / Photo: Etienne Ansotte.

Last Thursday the European Central Bank announced it will pump extra piles of freshly printed money into Eurozone’s banking system. The President of ECB, Mario Draghi said that he will be delivering €80 billion a month for the public bonds owned by banks for as long as it is needed. On top of this, the ECB will refinance the banks with targeted injections of as much money as they want, through long term loans at zero interest rate.

It’s difficult to assess the full amount the ECB is to upload on the banking system during the next twelve months, but it should be well above one trillion. Market pundits say the ECB with its new extraordinary monetary measures has deactivated all backstops. Let’s see the details.

The long awaited meeting of ECB’s governing council of 10 March finally decided to abandon its cautious policy of gradual monetary easing, and opened wide all its coffers for the lenders to feast. In the face of it the ‘official’ rationale for this spectacular change of course is the negative inflation rate recorded last February at -0.2%. On top of that, the ECB staff macroeconomic projections for the euro area, foresee annual HICP inflation at 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018.

Fighting low inflation

Given that, for years, inflation oscillates around zero, far below ECB’s target set at close to 2%, the ECB is justified to now release an extraordinarily generous accommodative monetary policy. Not to forget that the core of ECB’s mandate is to maintain price stability by targeting an appropriate inflation rate. To do this the central banks uses relevant monetary policy instruments and procedures.

In reality, the ECB has been rather too late in applying significant non-standard monetary policy measures, in order to fulfill its main duty of securing price stability. It’s not only that though. The ECB is now about to flood the banks with zero cost cash in order to help them recapitalize through profiteering on the real economy.

It’s always the banks

The system works like so; the banks lend the money they receive for free charging hideously high interest rates. In this way, they usurp the value produced in the real economy. That’s why this author observed here above that low inflation is just the ‘official’ reason for this money bonanza to banks. Everybody knows that the major Eurozone banks are dangerously undercapitalized.

Coming back to last Thursday’s decisions, Mario Draghi said the ECB will be pumping an extra €20 billion a month into Eurozone’s financial system. This will be realized by expanding the monthly asset purchase program from €60 billion at present to €80bn. This newly printed money will be handed out to banks against government or other public entity bonds they hold. Draghi added that the program will continue at least until March 2017 or for as long as it is needed to bring inflation back on course. One could add, and until the banks manage to get decently recapitalized.

Flooding the market

This asset purchase program is now twelve months long. On 9 March 2015, the ECB started buying public sector securities at a tempo of €60 billion a month. Up to now the program has accumulated a round sum of €750bn. The program will be extended now to €80 billion a month. Under it, the ECB is to spend at least €960bn until March 2017, but this is bound to continue “for as long as it is needed”. This means the €960bn are the down limit for this program for the next twelve months.

However, there is more money for the banks. This June, the ECB is to introduce another program to support the banks, called Targeted Long Term Refinancing Operations (TLTROs). Under it, the banks will be entitled to borrow the equivalent of up to 30% of the stock of eligible loans they had on their books on 31 January 2016 and, understandably, this will be at a flat zero interest rate.

By the way, last Thursday, the ECB lowered its key interest rate to flat zero from a meager 0.05%. As a result, from now on the banks will be able to refinance themselves from the ECB at zero cost. The interest rate on the money the banks deposit with the ECB is lowered by 10 basis points to -0.40%. Consequently, the Euribor (interbank interest rate in the London market) will be accordingly adjusted deeper in the negative region, further perturbing the money and capital markets.

All markets rallied

It seems though that the capital markets don’t mind much about that for as long as they receive free money. As expected then, all those groundbreaking changes were received in the stock markets with enthusiasm. It couldn’t be differently, since Draghi said plainly he is handing out to banks more free money. In any case, his extraordinary new package had a strong and lasting impact on every market. Even crude oil rebounded and together with it the energy shares gained a lot of ground.

As a result, all stock exchanges on both shores of the Atlantic continued rallying till late last Friday afternoon. This is a strong indication of what the banks will do with at least a large part of Draghi’s new money bonanza. They will for sure use it to create new bubbles in the capital markets. Predictably, only a part of it may find its way to the real economy, as new loans to consumers and businesses.

What next?

In conclusion, Draghi’s most recent and critical bet will be decided in relation to the extent the real economy is to profit. If the real economy won’t react strongly to cheaper money, the additional liquidity will just cause financial bubbles. And this time, the illusion will be much more dangerous than the last one. What if a new financial crisis surfaces and the ECB is left out of ammunition, having now almost exhausted its arsenal?

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

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

As rural communities age, their public transport is shrinking. It’s time to fix this

Russia to cut gas supplies again: can the EU get back to growth without a solid energy market?

Women vital for ‘new paradigm’ in Africa’s Sahel region, Security Council hears

Transition between education and employment: how the internship culture is threatening the foundations of our education

Talent is worldwide. Opportunity is not. How can we redistribute it?

From Russia with love: Brussels and Moscow close to an agreement on Ukraine’s gas supplies

Confronting neo-mercantilism: why regulation is critical to global trade

A Sting Exclusive: “Digital and mobile technologies are helping to achieve an economic success in Spain”, the Spanish Secretary of State for Telecommunications and Information Society Víctor Calvo-Sotelo reveals to the Sting at Mobile World Congress 2015

Charges against Baha’i in Yemen must be dropped: UN experts urge release of detainees

Towards a European Republic

OECD household income up 0.7% in first quarter of 2018, outpacing GDP growth

EU leaders agree on 2030 Climate and Energy Package: is “flexible” brave enough?

Food safety: more transparency, better risk prevention

Is euro to repeat its past highs with the dollar?

Solutions for cultural understanding: medical students’ perspective

This is why Dutch teenagers are among the happiest in the world

As monsoon rains pound Rohingya refugee camps, UN food relief agency steps up aid

EU’s social crisis and unemployment to deteriorate

This is the world’s biggest mental health problem – and you might not have heard of it

A Sting Exclusive: “Doing ourselves a favour”, Vice President Dombrovskis underscores that this time growth has to come from within the EU

Ebola: EU provides an additional €30 million to tackle the outbreak in the Democratic Republic of Congo

Interview with ourselves: the mental health of health professionals

Doctors are humans too: the benefits of embracing your mental status

Women-Friendly Spaces for Rohingya refugees: A place for protection and care

Commission: Do it like the Americans in the food sector

President Juncker temporarily transfers portfolio responsibilities following departure of two Members of the European Commission

Latest tragedy in the Mediterranean claims over 100 lives – UN refugee agency

rescEU assets mobilised to help Greece fight devastating forest fires

Tuesday’s Daily Brief: Venezuela-Colombia baby breakthrough, Italy piles on rescue boat pressure, States must combat hate, Kashmir rights latest and a musical plea to combat CAR hunger

Eurozone: Even good statistics mean deeper recession

More than four in 10 women, live in fear of refusing partner’s sexual demands, new UN global study finds

Conflict prevention, mediation: among ‘most important tools’ to reduce human suffering, Guterres tells Security Council

3 reasons why most Africans aren’t on the internet – and how to connect them

Further reforms needed for a stronger and more integrated Europe

25 years after population conference, women still face challenges to ‘well-being and human rights’, says UN chief

70 years on, landmark UN human rights document as important as ever

‘Huge’ stakes, ‘daunting’ job to tackle gender-based violence, UNICEF chief tells ground-breaking conference

South Africa still hasn’t won LGBTQ+ equality. Here are 5 reasons why

Commission launches two projects to support cooperation and innovation in Romanian regions and cities

3 ways to fight stress at work

EU Top Jobs summit ended with no agreement: welcome to Europe’s quicksand!

EU to spend €6 billion on youth employment and training futile schemes

The good news on pensions: sustainable equals profitable

Women must be at ‘centre of peacekeeping decision-making’, UN chief tells Security Council

Leading Palestinian legislator calls for ‘new international engagement’ in two-state solution

The Ukrainian crisis to destabilize Europe and the world for a long time

Millennials aren’t voting – but these young leaders have a plan to change that

The role of students in a migration crisis in Roraima, Brazil

IPCC reports devastating climate consequences; US in denial while EU does not fully support the 2050 net zero emissions target

Spotlight Initiative – EU and UN fight against domestic violence in the Pacific region

Healing of ozone layer gives hope for climate action: UN report

End ‘shame, isolation and segregation’ of fistula sufferers, urges UN reproductive health chief

The European Union and Central Asia: New opportunities for a stronger partnership

The health of the human being in coexistence with a transformative biosphere

‘Rare but devastating’ tsunamis underscore need for better preparation, UN chief urges on World Day

Service and Sacrifice: Guinean peacekeepers make their mark in Mali

EU–US: What is the real exchange in a Free Trade Agreement?

€5 billion of EU energy efficiency project money spent on “comfort”

To flourish in the Fourth Industrial Revolution, we need to rethink these 3 things

More Stings?

Comments

  1. The ECB’s and other central banks’ “unconventional” monetary policies are not designed, as some still want to believe, to fire up the growth engine through boosting aggregate demand. They are designed to provide a backstop for the world’s debt-based monetary and economic system – and for the economic and political power structures that are reliant on its permanence.
    #SuperMario vs. #Deflationzilla. Place your bets! No more bets!
    https://paularbair.wordpress.com/2016/03/12/supermario-vs-deflationzilla/

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