The ECB again takes care of the bankers not the people

ECB Press Conference – 27 Apr 2017. President Mario Draghi arrives at the Conference room. ECB Audiovisual services photo; some rights reserved.

Last week the European Central Bank surprised everybody by letting it be known that interest rates will “remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases”. To be noted, presently, the main refinancing operations interest rate is zero. Of course, the markets expected ECB’s President Mario Draghi to keep the main rates at their present levels for an extended period of time. However, his remark that the phase of zero main interest rate to be extended beyond “the horizon of our net asset purchases”, raised some eyebrows in Germany, the only Eurozone member state that says it has much to lose from low interest rates. Let’s see if the Germans are sincere.

Draghi’s idea behind this is that most Eurozone member states and more so the over indebted ones, will be certainly needing too low interest rates in the foreseeable future. It’s very difficult to imagine how Italy, Greece, Spain, Portugal, Ireland and probably even France and Holland can repay their huge public and private debts, if the ECB stops injecting into the Eurozone economy zero cost refinancing. Nevertheless, the ECB has to stop some time sooner or later its program of money printing through public debt purchases, because there is a lot of cash spinning around. In this case though it’s difficult to imagine how the over indebted Eurozone countries will cope with the higher interest rate cost in refinancing their debts. Forcibly they will cut down social spending.

Refinancing debts

It’s not only the ‘extravagant’ South that needs zero interest rates to keep it going though. The Dutch households and the private sector in general are also over indebted. Already Holland’s banking industry has paid the price for imprudent exposure with the bankruptcy of ABN Amro, the Fortis Bank Nederland and DSB Bank. The most important question though is, can the German and the French mega – banks cope with increasing interest rates? And the answer is no, they cannot because they are dangerously undercapitalized and plagued by non performing loans.

Not to say anything about the heavy fines they are paying on the other shore of the Atlantic Ocean. Deutsche Bank, Commerzbank, BNP Paribas, Crédit Agricole and Société Générale are all dangerously undercapitalized and need zero cost refinancing from ECB, for a period practically impossible to say how long it has to be. Now, what Draghi says is tantamount to rescuing the banks at the cost of the people, since the ECB cannot continue doing both. This is the real meaning of the ECB continuing to refinance the banks at zero interest rates, but stopping the support to governments by ending the purchases of public debt. It’s not the first time that the people are neglected for the well being of banks.

The good old story

Eurozone’s hardest hit from the 2008-2010 financial meltdown countries (Greece, Ireland, Spain and Portugal) practically saved then all the above mentioned French and German banking giants. Those four Eurozone member states were more or less politically blackmailed by Berlin and Paris not to go bankrupt. Instead they were ‘saved’ by the German and the French governments on condition to accept to repay their debts to the Franco-German banks at nominal values.

In this way, the banking giants got back in full the imprudent credits they had accorded to every possible and impossible borrower, and thus were rescued from bankruptcy (see The German and the French governments didn’t allow Greece, Ireland, Spain and Portugal to negotiate with the banking leviathans an agreement, which would have included a write off of the principal. This is the standard practice though, when the borrower becomes insolvent. The US did that with the South American loans of the New York banks in the 1980s. But no, the four poorest Eurozone countries were politically forced to save the most imprudent European banks of the affluent North.

It’s always the banks

Yet, it seems that this was not enough. Today the Franco-German banking giants need more zero interest rate refinancing in order to painstakingly recapitalize themselves. So, last week, Draghi bowed to the banks and stated that the zero cost refinancing of the banks will continue “well past the horizon of our net asset purchases”. In short, the President of ECB says here that the banks will continue to be favored by the central bank, even after it stops purchasing public debt.

The idea is that the ECB, by purchasing public debt, helps the governments refinance their obligations at lower interest rate cost and thus are able to apply social support measures in favor of the population. Now, Draghi confirms that the ECB will continue supporting the banks well after having stopped assisting the Peoples of Eurozone. Germany, and to a lesser degree France, must have been the main force behind this. The reason is that Germany doesn’t need ECB’s support in order to refinance its public debt.

German hypocrisy

At the same time though, the German banks still need and will continue needing in the foreseeable future, zero cost refinancing from ECB, in order to recapitalize themselves. In the case of France, the country needs both, ECB’s intervention for government debt refinancing and zero cost refinancing for the banks. That’s why it must have been mainly Germany behind Draghi’s reassurance that the Eurozone banks will continue to be backed well after the central bank has stopped supporting the governments and the Peoples of Eurozone.

In conclusion, Berlin and Paris are still complotting against the South of Europe and Ireland. Italy, Greece, Spain, Portugal and a number of smaller Eurozone countries will be soon obliged  to take more unpopular measures, in order to pay for the additional cost for their public debt refinancing. Not the banks. Bankers will continue being favored by ECB’s zero refinancing interest rate. The first ‘application’ of this scheme was last Monday’s agreement for more tax increases and pension cuts Athens was forced to accept, in order for Greece to continue being refinanced from the European Stability Mechanism. Again it’s the banks above the people.













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