Draghi’s negative interest rates help Eurozone’s cohesion

European Central Bank Press Conference – 6 June 2019, Vilnius, Lithuania. Mario Draghi, ECB President (in the middle), Vitas Vasiliauskas Chairman of the Board, Lithuanian Central Bank (on the left) and Christine Graeff, ECB Director General, Communications, (ECB photo, some rights reserved).

Super Mario did it again. Only months before leaving the helm of the European Central Bank he made sure his accommodative monetary policy will hold well, even after he leaves Frankfurt am Main. Last Thursday, he pushed interest rates below the zero level for at least another year. Even if his successor will be a hawk supporting restrictive policies, it will be very difficult to start paying interest rates to German pensioners’ bank deposit accounts.

Speaking to journalists after the last ECB Governing Council meeting in Vilnius, Lithuania, Draghi was adamant: “For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation plus 10 basis points”.

Negative interest rates

After recently introducing the ‘targeted longer-term refinancing operation III’ for banks or TLTRO III, now he and the Governing Council decided that the ECB will actually pay its borrowers. This is because ECB’s “average interest rate on the deposit facility” is currently at -0.40%. Add to that 10 basic points of interest and you end up with -0.30%. In other words, at the end of loan’s maturity, the borrower will return to ECB 0.30% less than what was initially received. To be noted, only the banking industry, aka the commercial banks, can borrow from the ECB.

There is more to it though. A commercial lender, the moment it asks and receives the loan from the central bank, can lock the negative interest rate prevailing at the moment of receiving refinancing, aka loan. Draghi clearly explained that the interest rate of the loans will continue “prevailing over the life of the operation” because it falls in the TLTRO III program, introduced by the ECB some months ago. Now, however, the interest rate the banks are going to pay won’t be a flat zero but in fact a clearly negative -0.30% or a gift for ‘choosing us to get you billions’.

Supporting growth

Of course, Draghi is not simply a benefactor of the euro area banking industry. He really aims at further cutting down the interest rate costs paid by the over-indebted governments of Eurozone, when refinancing their maturing debts. Surprisingly enough, at the moment the governments of Greece and Italy, the two most over indebted countries of the 19 member euro money area, pay for their borrowing less than the United States, a country which has never defaulted on her debts. This must be exclusively attributed to ECB’s extraordinary measures.

For example, last Friday, Greece’s ten year government bonds were traded at yields well below 3%, while the US government pays for its new ten years bond issues around 3.5%. Italy borrows at even lower interest rates, while the German ‘bunds’ are at times traded much above par at negative yields. During the past few days, investors from all over the world flocked to Eurozone’s capital markets, pressing European government bond prices yet higher and yields lower.

Obviously, Draghi aims at supporting the languishing again euro area economy. Last month, inflation, and growth together, took a dive again. He explained: “Despite the somewhat better than expected data for the first quarter, the most recent information indicates that global headwinds continue to weigh on the euro area outlook”.

Interest rates may fall further

For this reason, the ECB is pressing its interest rates not only to the negative region but: “Looking ahead, the Governing Council is determined to act in case of adverse contingencies and also stands ready to adjust all of its instruments”. In short, ECB’s interest rates may fall further down the negative part of the chart “in case of adverse contingencies”.

Understandably, Italy and Greece are more in need of lower interest rates than Germany and Holland. Nevertheless, the lower the cost of money, the better for economic growth all over Eurozone. As Draghi puts it, the ECB is determined “to maintain favorable liquidity conditions and an ample degree of monetary accommodation”.

This is Draghi’s way to help Eurozone to maintain coherence. However, for many years now the German hawks have been pressing for less accommodating monetary policy. So, for a good reason, they can be rightly accused of not caring about cohesion and growth for all 19 member states of Eurozone. This is a strong proof that Germany, despite being an economic giant, remains a political dwarf.

the sting Milestone

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

UN and partners appeal for $920 million to meet ‘dire needs’ of Rohingya refugees

This is what different countries are doing to stop coronavirus from spreading

German Presidency outlines priorities to EP committees

Protecting citizens’ access to social security in case of no-deal Brexit

Rule of law in Poland: MEPs point to “overwhelming evidence” of breaches

MEPs want to boost energy storage in the EU to help spur decarbonisation

Latest leaked TTIP document confirms EU sovereignty may be under threat

Does Greece really weigh what is asking for today in Russia?

Why India is ready to become a supercomputer power

Main results of EU Environment Council, 25/06/2018

Do not take the EP’s consent on MFF for granted, says Budget Committee Chair

New book honours UN women who made HERstory

‘Warp speed’ technology must be ‘force for good’ UN chief tells web leaders

‘Beyond reasonable doubt’, international court convicts notorious DR Congo rebel leader of war crimes

IMF’s Lagarde: Estimating Cyber Risk for the Financial Sector

Recognizing, protecting and empowering youth rights in Europe and the world

What universities can learn about citizenship in the COVID-19 pandemic

Coronavirus makes inequality a public health issue

New Eurobarometer survey shows: The majority of Europeans think the EU should propose additional measures to address air quality problems

Pandemic and quarantine: What can we do for our mental health?

Ukraine-EU deal sees the light but there’s no defeat for Russia

Peace operations benefit from improved cooperation between the UN and troop-providing countries, says peacekeeping chief

How will Brexit affect higher education in the EU?

How one traumatised child survived genocide and started a movement for mental health

Yemen: EU allocates over €70 million to help most vulnerable population

Chauvinism and xenophobia will lead to global assertiveness and more wars

Israeli security forces’ response to Gaza protests ‘a recipe for more bloodshed’, says UN expert

General Elections in Spain: Twitter organises the first digital debate to empower young people.

Is a full course lunch, a new Commissioner and 2 million anti-TTIP citizens what you would call a “Fresh Start”?

MEPs: Focus on crisis response when coordinating economic and budgetary policies

3 hard-won lessons from a decade of negative cleantech returns

“They are trying to make improvements, but of course they are quite slow for my generation”, Vice President of JADE Victor Soto on another Sting Exclusive

Human trafficking cases hit a 13-year record high, new UN report shows

The US reject EU proposal for prudential financial controls

Afghanistan: top UN official denounces ‘extreme’ suffering of civilians in Ghazni

Iraq: UN human rights report voices concern over conduct of ISIL fighter trials

Recognize, celebrate and ‘stand in solidarity’ with persons with albinism

These rules could save humanity from the threat of rogue AI

Threats from mammoth banks and Brussels fuel May’s poll rates

How Africa and Asia are joining forces on universal healthcare

Opening Remarks by H.E. Ambassador Yang Yanyi, Head of the Chinese Mission to the EU at the Chinese Fashion Night

How we can survive the great COVID lockdown: IMF Chief Economist Gita Gopinath

‘Extinction crisis’ pushes countries to agree stronger protection for global wildlife

3 unexpected consequences of the US-China trade war

Here’s why e-mobility must be at the heart of the green recovery

Sustainable Development Goals: making the world a better place

‘Bleakest period yet’ in Occupied Palestinian Territory: UN human rights expert

Why the evolution of blockchain reliability is critical to protecting your digital assets

The ECB tells Berlin that a Germanic Eurozone is unacceptable and doesn’t work

We must stop choking the ocean with plastic waste. Here’s how

At UN, Middle East countries discuss steps towards regional nuclear-free zone

This disease once wiped out 60% of Europe’s population – and now it’s back

This project is turning abandoned fishing gear into volleyball nets

COVID-19 has accelerated the digital transformation of higher education

Food finally features in the climate debate. Now what?

‘We need to do more’ to transform the world, deputy UN chief tells African audiences

How TV has brought mental health issues into the light – and helped to banish stigma

5 amazing schools that will make you wish you were young again

This is how countries compare on gun deaths

Eurozone: New data show recession and debt closer to explosion

More Stings?

Advertising

Trackbacks

  1. […] refused to budge higher. Soon after, eurozone bond markets surged and yields plunged. Under the TLTRO III (Targeted longer-term refinancing operations) program, introduced by the ECB some months ago, the interest rate banks are paying won’t be a […]

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