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

Coronavirus response: over €1 billion from EU Cohesion policy to support Spain’s recovery

The hidden pandemic: mental illness

JADE Team at the European Business Summit 2017

Populist Eurosceptics helped by Trumpists seriously threaten the EU edifice

A Sting Exclusive: “Entrepreneurship in the Coronavirus (COVID-19) era” written by the Vice-President of Junior Enterprises Europe

‘Endemic’ sexual violence surging in South Sudan: UN human rights office

Eurozone governed by an obscure body and gray procedures

Climate changes and the imminent public health crises

Eurozone recession subsides

More funds needed to counter ‘persistent and multi-faceted humanitarian problems’ in Ethiopia

Cohesion Policy after 2020: preparing the future of EU investments in health

On their epic journeys, migratory birds connect nations and inspire people, UN says on World Day

Rapid action needed for people to meet challenges of changing world of work

Libya ‘in race against time’, but dissolving conflict ‘a realistic prospect’, Security Council hears

Why India can show us how to achieve growth with purpose

Opening – February plenary session, 27 new seats

Telemedicine and the Brazilian reality

This is what great leadership looks like in the digital age

UNESCO food and culture forum dishes up fresh serving of SDGs

‘True’ peace, requires standing up for human rights, says UN chief Guterres

Iran: UN rights chief ‘deeply disturbed’ by continuing executions of juvenile offenders

WhatsApp to face scrutiny from EU regulators task force over data sharing with Facebook

Tuesday’s Daily Brief: funding for Palestine refugees, families today, tech surveillance

UN and African Union in ‘common battle’ for development and climate change financing

China is adding a London-sized electric bus fleet every five weeks

UN investigates systematic sexual violence across South Sudan

They won this year’s Nobel for economics. Here’s why their work matters

Living to 100: why we should plan for more sushi, chocolate and work

COP22 addresses a strong global pledge to effectively implement the Paris Agreement

Restore hope that peace will come to the Middle East, UN negotiator urges Security Council

Seaweed straws and loose-leaf tea: 6 ways to reduce plastic waste

South Sudan ‘heading towards lasting peace and stability’, UN General Assembly told

3 ways activists are being targeted by cyberattacks

Facts and prejudices about work

How global tech companies can champion ethical AI

Universal Health Coverage in the EU: Are we really leaving no one behind?

Easier Schengen Visas for non-EU holiday makers: A crucial issue for south Eurozone countries

Yemen agreement to end southern power struggle ‘important step’ towards peace: UN Special Envoy

System value can power the energy transition in emerging markets

Future of Insurance Claims in Focus at Fourth Annual Connected Claims Europe Summit

The multidisciplinary team facing the multidrug resistant form of Tuberculosis in the state of Amazonas (Brazil)

Ukraine pays the price for lying between Russia and the EU

UN experts urge Turkey to repatriate Irish woman associated with terror group

We won’t win the online security war without people power

Across the world, women outlive men. This is why

A ‘system value’ approach can accelerate the energy transition. Here’s how

How tiny countries top social and economic league tables (and win at football, too)

Geopolitics and investment in emerging markets after COVID-19

The blackened white coat of the doctors

COP21 Breaking News: “There is an ecological debt that the world needs to pay back to Africa”, French President Francois Hollande promises 2 Billion euros by 2020 from Paris

Conference on Future of Europe should start “as soon as possible in autumn 2020”

Roma integration: fight social exclusion, poverty and anti-gypsyism, MEPs demand

Car rentals: EU action leads to clearer and more transparent pricing

Paradise islands of Pacific increasingly vulnerable to climate change, as UN boosts resilience

Key quotes from China’s Premier Li on COVID-19, the economy and US relations

Right2Water initiative: Is the Commission ready to listen to citizens?

Coronavirus: Commission Statement on consulting Member States on proposal to prolong and adjust State aid Temporary Framework

3 ways to stop COVID-19 from drying up start-up talent pools

UN launches ‘South-South Galaxy’ knowledge-sharing platform in Buenos Aires

Investors have a role in securing our shared digital future

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