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 Milestones

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

Number of migrants now growing faster than world population, new UN figures show

More refugees being helped by family, work and study permits, finds OECD and UNHCR study

Team Europe partners with Equity Bank to support Kenyan business and agriculture amid COVID-19

Crowdfunding: what it is and what it may become

EU threatens Japan to suspend FTA negotiations if…

COVID 19 and the consequences in the fight against HIV

Will the EU reconsider Frontex’s role in light of accusations about violations of migrants’ human rights?

EU readies for eventual annulment of the Turkish agreement on immigrants-refugees

More solidarity and interaction between generations needed to challenge age stereotypes and ingrained ageism

As India’s lockdown ends, a mental health crisis is just beginning

EU approves €100 million for the post-earthquake reconstruction in Albania

Oh, well, you are wrong, Google responds to the European Commission

Taj Mahal closes as European Union considers non-essential travel ban – Today’s COVID-19 updates

The MH17 tragedy to put a tombstone on Ukrainian civil war

Commission launches two projects to support cooperation and innovation in Romanian regions and cities

A chemistry professor explains: why soap is so good at killing COVID-19

There’s a new global technology race. It needs better trade rules

To hope or doubt? The state of women’s progress in the world

Peacekeeping: A ‘great opportunity’ to develop professionally and personally

UN chief welcomes DR Congo President’s promise to stand down

Republic of Korea President proposes DMZ as future ‘peace and cooperation district’ on Peninsula

Burnout is a pandemic. Why don’t we talk more about it?

Friday’s Daily Brief: UN chief in China, counter-terrorism, updates from Bangladesh, Mali and Mozambique

State aid: Commission approves €10 billion Spanish fund to provide debt and capital support to companies affected by the coronavirus outbreak

FROM THE FIELD: Children in warzones denied right to education

Companies must focus on resiliency, profitability and sustainability

The climate and COVID-19: a convergence of crises

The EU moulds a new compromise for growth and financial sustainability

Security Council must ‘come together’ to address the plight of children trapped in armed conflict, says UN envoy

Workplace risks: Final vote on protection from carcinogens, including diesel fumes

Recovery and Resilience Facility: Croatia and Lithuania submit official recovery and resilience plans

Vaccines: from miracle to possible danger

Four lessons for a successful switch to value-based healthcare

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

The 4 biggest challenges to our higher education model – and what to do about them

Reform of road use charges to spur cleaner transport and ensure fairness

Technology can hinder good mental health at work. Here’s how it can help

The scheming of Boris: win an election after a no-deal Brexit

World’s human rights watchdog spotlights Afghanistan, Yemen and 12 others: Here’s the scoop

Why it’s time to take central banks’ digital currencies seriously

A Sting Exclusive: “Technology for all, development for all: the role of ITU”, written by the Secretary General of the United Nations Agency

How India is harnessing technology to lead the Fourth Industrial Revolution

EU’s guidelines on net neutrality see the light although grey areas do remain

Digital Assembly 2021: Leading Europe’s Digital Decade

What wealth managers can learn from family dynamics

Vĕra Jourová, European Commissioner in charge of Justice

The New EU-US “Shield” for data privacy is full of holes

EU survey confirms citizens’ call for EU to have more powers to tackle pandemic

Failure to register newborns leaves millions ‘invisible’ warns UN Children’s Fund

MWC 2016 LIVE: Stripe gives payments leg-up to startups in emerging markets

What lessons to draw from the destruction of Syria

Biblioburro: The amazing donkey libraries of Colombia

The India–U.S. trade dispute and India’s evolving geopolitical role

Syria: UN health agency highlights ‘critical health threats’ facing Idlib civilians

Crisis hit countries cut down public spending on education

One is not born, but rather becomes, a woman

Pakistan: a long road ahead

Century challenge: inclusion of immigrants in the health system

Coronavirus: MEPs call for solidarity among EU member states

Breaking barriers between youth in the new tech era: is there an easy way through?

A Europe that Protects: Commission calls for decisive action on security priorities

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