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.

Advertising

Advertising

Advertising

Advertising

Advertising

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

How the inventor of the internet plans to make it safe and accessible for everyone

External action: more funds for human rights, development and peace

China invites the EU to a joint endeavor for free trade and order in the world

EP President praises Nobel Peace Prize award to Denis Mukwege and Nadia Murad

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

Prosecution of Paraguay judges over peasant ‘massacre’ ruling could undermine rule of law: UN expert

The EU pollution rights trading system frozen

Amsterdam has a bubble barrier to catch canal plastic

EU Parliament: A catastrophic crisis management by European leaders

Who and why want the EU-US trade agreement here and now

Cédric in India

Brexit talks stalled at launch; issues with European Court’s authority in Britain

5 amazing people fighting to save the oceans

MEPs propose measures to combat mobbing and sexual harassment

How a more integrated approach could help to end energy poverty

UN chief welcomes new Government in Lebanon, after eight-month impasse

Why Africa must be ready to take the quantum leap

7 ways for businesses to capture the youth dividend

Alarming number of women mistreated during childbirth, new UN health agency figures show

Yemen war: UN-backed talks to silence the guns due to begin in Stockholm

Ocean life faces ‘onslaught of threats’ from human activity, but tools exist to save it

Why Eurozone urgently needs the ECB to print and distribute at least €500 billion

115 rejections and no pay. What it really takes to be an entrepreneur

The UK to split if May’s hard or no-deal Brexit is pursued

European car industry: The Germans want it all

Idea of ‘homogenous’ Polish culture is a myth: UN human rights expert

EU and African leaders to jointly tackle the migration crisis across the Mediterranean

Building a stronger Europe: new initiatives to further boost role of youth, education and culture policies

Deadly swine fever threatens Asia, UN agriculture agency warns, urging regional collaboration

Now doctors can manipulate genetics to modify babies, is it ethical?

Migration crisis will keep deteriorating as common EU political will is simply not there

UNIDO promotes post-harvest excellence for mangoes in the Mekong River Delta of Viet Nam

Why is the World Health Organisation so much needed?

‘Path to peace’ on Korean Peninsula only possible through diplomacy and full denuclearization: US tells Security Council

Multilateralism more vital than ever, as World War centenary looms: Security Council

EU helps tackle air pollution in Kosovo with €76.4 million

European Junior Enterprise Network – Ready to take the Step Into the Future?

YO!Fest back in Strasbourg for the 2nd edition of the European Youth Event – 20-21 May 2016

Don’t let smoking steal life’s breathtaking moments, urges UN health agency

Africa must ‘value youth’ in the drive towards lasting peace, young envoy tells Security Council

Parliamentary bid to democratize Myanmar constitution a ‘positive development’ says UN rights expert

After globalization what? Europe’s long, straining shake-up post Davos wreckage

The five stages of the Chief Digital Officer – and why they often fail

Bram in Colombia

Labels for tyres: deal for greener and safer road transport

EU Budget: InvestEU Programme to support jobs, growth and innovation in Europe

EU shapes its ambitious strategy on India

EU on track to end use of chemicals harming the ozone layer

What the future holds for the EU – China relations?

Climate change: Direct and indirect impacts on health

EU Parliament shows its teeth in view of 2014 elections

Only one in five countries has a healthcare strategy to deal with climate change

CHINA: five letters that could mean…

An economist explains why women are paid less

2018 Golden Pen of Freedom Awarded to Maria Ressa of the Philippines

Brexiteer May gets lip-service from Trump and Turkish promises from Erdogan

Climate change brings a host of other risks for businesses

Oslo leads the way in ‘Breathe Life’ campaign for cleaner cities in climate change era

These are the places with the most climate change deniers

The world is facing more disasters. This is how data can help us reduce that risk

More Stings?

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