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

Advertising

Advertising

Advertising

Featured Stings

Commissioner sings “Volar-e” but the European driver no “Cantar-e”

Parliament votes reform for better European Co2 market but critics want it sooner than later

The Commission unsuccessfully pretends to want curbing of tax evasion

Ecofin: ‘The Friday battle’ for the banking union

Climate change will never be combatted by EU alone while some G20 countries keep procrastinating

The ECB again takes care of the bankers not the people

Summer pause gives time to rethink Eurozone’s problems

Vulnerable young people must not be blamed & stigmatised for violent radicalisation

‘Free state aid’ for imprudent banks

Draghi’s ‘quasi’ announcement of a new era of more and cheaper money

“Hasta la vista” Google says to Spain and now Europe is next?

Apparently the EU Digital Single Market passes necessarily from China’s Digital Silk Road

Commission and ECB prepare new financial mega-tool in support of SMEs

Diana in Vietnam

VW emissions scandal: EU unable to protect its consumers against large multinationals

EU seeks foreign support on 5G from Mobile World Congress 2015 as the “digital gold rush” begins

Camino de Santiago – a global community on our doorstep

Greek citizens to pay the price again but Tsipras risks losing next elections

European banking stress tests 2014: A more adverse approach for a shorter banking sector

It is me

Will Europe be able to deal with the migration crisis alone if Turkey quits the pact?

EU-India summit: Will the EU manage to sign a free trade agreement with India before Britain?

Europe united in not supporting a US attack on Syria

EU prepares a banking union amidst financial ruins

ECB readies itself for extraordinary monetary measures defying Germany

Eurozone banks are unable to support real economy’s dawning growth

EU agricultural production no more a self-sufficiency anchor

It ain’t over until Google says it’s over

The MH17 tragedy to put a tombstone on Ukrainian civil war

Impacting society with digital ingenuity – World Summit Award proclaiming the top 8 worldwide

Greece at the mercy of ECB while sailing through uncharted waters

Chinese economy to raise speed and help the world grow

Public opinion misled by the Commission on air transport safety

Menu for change: why we have to go towards a Common Food Policy

Poverty and social exclusion skyrocket with austerity

London to say hello or goodbye to Brussels this week

My unlimited China

The Eurogroup has set Cyprus on fire

China is now heavily endorsing its big investment flow in the Central Eastern European (CEE) countries

Eurostat: Real unemployment double than the official rate

Germany objects to EU Commission’s plan for a Eurozone bank deposits insurance scheme but Berlin could go along

EU out to conquer African Union summit

European Commission: Does Apple, Starbucks and Fiat really pay their taxes?

EU Commission – US hasten talks to avoid NGO reactions on free trade agreement

Lithuania needs to get rid of the victim mentality

EU imposes provisional anti-dumping tariffs on Chinese solar panels

The Sting’s Values

WEF Davos 2016 LIVE: “European unity and cooperation is being called on question”, Vice President Joe Biden criticizes from Davos

The European Commission cuts roaming charges. But “it’s not enough”…

What lessons to draw from the destruction of Syria

Bugged Europe accepts US demands and blocks Morales plane

MWC 2016 Live: Industrial world prepares to reap digital benefits

Bayer-Monsanto merger: the story of the rise of the “endless company”

Athens searches frantically for a new compromise between politics and economic reality

European Court of Justice to Google: It is #righttobeforgotten but not #righttoberemembered

MWC 2016: IoT experts fret over fragmentation

IMF to teach Germany a Greek lesson

A Sting Exclusive: “Junior Enterprises themselves carry out projects focusing on the environment”, JADE President Daniela Runchi highlights from Brussels

European Youth Forum welcomes adoption of Sustainable Development Goals and calls on European countries to not ignore them!

How to test if Kiev’s ‘Maidan’ was an authentic revolt or a well-planned operation

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 )

Twitter picture

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

Facebook photo

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

Google+ photo

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

Connecting to %s