Draghi: ECB to flood Eurozone and the world with more zero cost money; risk of drowning in cash

European Central Bank Press Conference, 7 March 2019, Frankfurt am Main. (On the right) Mario Draghi, President of ECB and Luis de Guindos, Vice-President of ECB. (ECB photo, some rights reserved).

Last Thursday, the European Central Bank decided to start again feeding the bankers with more zero cost trillions. This was a surprise to many, because everybody thought the €2.6 trillion the ECB has already handed to banks free of charge were enough. Seemingly, Mario Draghi thinks it is not and hurried to invite the bankers to help themselves freely from the central bank’s coffers.

So, in the afternoon, after the last Governing Council meeting of Eurozone’s central bank, Draghi informed all the financiers of the world, there will be more zero cost money for them. He announced “a new series of quarterly targeted longer-term refinancing operations (TLTRO-III), starting in September 2019 and ending in March 2021, each with a maturity of two years”. He assured the bankers they can help themselves with free money from ECB up to 30% of their ‘eligible’ loans. We all know how easily the bankers can turn their own shabby ‘investments’ into eligible loans for ECB’s refinancing.

€2.6 trillion and counting

Of course, the new money will be again free of charge, as it is the case with the €2.6 trillion the bankers have already received from ECB. To this end, the head of ECB reassured the money Leviathans that the new refinancing will be, “at a rate indexed to the interest rate on the main refinancing operations over the life of each operation”, which of course is stuck flat at zero.

The ‘European Sting’ anticipated this development. On 21st of last February, it posted an article predicting that the ECB will follow its American counterpart, the Fed, in extravagantly favoring the banks, with more lavishly accommodative measures. It was an ECB’s Executive board member who said it plainly three weeks ago. So, on 15 February while in New York, at the right place in the American Council on Foreign Relations, Benoît Cœuré, underlined that “The ECB would then be called on to increase its activities as an international lender of last resort”.

More cash for the moneyed

Actually, then, the ECB plans to help not only feed the Eurozone banking Gargantuans, but all the big lenders at international level. This Draghi move however, pushes the whole financial industry many steps forward, leading to the absolute domination of banks on the real economy. The lenders can now refinance 30% of their imprudently risky investments in all and every grey or dark market at zero interest rate cost. Plainly, the ECB opens its coffers for the moneybags to help themselves.

Of course, the background for this new round of extra accommodating monetary policy is that, “the weakening in economic data points to a sizeable moderation in the pace of the economic expansion that will extend into the current year”. This is exactly what Draghi said last Wednesday and alas, this is rightly so. The Eurozone economy has lost its upwards momentum and risks entering a low growth, low inflation period with interest rates practically at the zero level. ECB itself has stuck its bank refinancing rates at flat zero for many years year now.

Low growth, inflation and zero interest rate

With ECB’s bank refinancing interest rate at zero though, there is a problem. The euro area central bank is left without any important policy instrument to fight a highly probable economic recession in the real economy. As for the extra liquidity tool of the just announced TLTRO-III program, the impact against a possible recession is not expected to be measurable, because all and every money market is already flooded with cash.

On top of that, almost ten years of super low interest rates -barely above the zero region – have worked their way upsetting the fundamentals of the entire financial system. They have already created ominous side effects like high risk ‘investments’ in the grey economy. Still, the ECB announced at least two more years of zero interest rates, in view of a languishing euro area economy.

Upsetting the basics

Obviously, the euro area economy still badly needs zero interest rates for a long period of time. There is an unfortunate precedent of that. In Japan, the period of zero interest rates, close to zero growth and super low inflation lasted ten years, from the late 1990s until the late 2000s. The Bank of Japan was then forced to pass on to the negative interest rates region and flood the economy with liquidity.

The Tokyo government followed, and under the Abenomics of Prime Minister Shinzō Abe the state debt skyrocketed to 253% of the country’s GDP. However, this is mostly internal debt, with the Japanese investors still willing to invest in it and accept to lose something in order to support their country. Europe’s ability to imitate that is very doubtful. The German savers will declare war to the Southerners.

In any case, Japan has now barely escaped from stagnation with GDP growth around 2%. Still, the country is condemned to negative interest rates, persistently super low inflation, huge government debt and a central bank’s balance sheet exceeding the GDP. It seems Eurozone is close to that, with whatever it may politically entail.

In such a case, the next financial crisis will find a good part of the developed world with no central bank ammunition to fight it, and, what is worse, amidst an explosive political environment – in Europe at least. Not to say anything about the dreaded possible spillovers on the global economy from a no-deal Brexit and the risks stemming from a US, under an unpredictable administration. True, this is a high risk world.

 

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