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

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

Discovering Europe: Free EU rail pass for 18 year olds

Human rights breaches in Bangladesh, Cuba and Vietnam

Artificial Intelligence: a danger to mankind, or the key to a better world?

The EU-US trade agreement, victim of right-wing extremists and security lunatics

Bitpay @ TheNextWeb 2014: Innovation’s Best Friend

Teenage girl’s death sentence spotlights Sudan’s failure to tackle forced marriage, gender-based violence – UN rights office

EU trade agreements deliver on growth and jobs, support sustainable development

Is it true that the G20 wants to arrest tax evasion of multinationals?

MEPs propose more transparent legislative drafting and use of allowances

A critical European young voice on Net Neutrality: the distance between Brussels and Washington

Germany loses leading export place

Is there a chance for the West to win the war on terror?

Guterres underlines climate action urgency, as UN weather agency confirms record global warming

How innovation from within is transforming International Organizations as well as lives

Here’s how the EU is doing on gender equality

A silent killer: the impact of a changing climate on health

LGBTQ+: The invisible poor on our healthcare

Camino de Santiago – a global community on our doorstep

After Brexit and Grexit, Brussels to deal with Poloust

Online radio and news broadcasts: Parliament and Council reach deal

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

2013, a Political Odyssey: What future for Italy?

Prospect of negotiated peace in Afghanistan ‘never been more real’ – UN mission chief

4 ways sporting events are becoming more sustainable

Why medicine is relevant to the battle against climate change

How we can embrace the electrical vehicle transition by adopting smart charging

European Border and Coast Guard: 10 000-strong standing corps by 2027

Onagawa’s spirit of togetherness: lessons from the 2011 tsunami

Defence: European Commission paves the way for first joint industrial projects under EU budget

EU-UK: A deal synonymous to ‘remain’, England pays the Irish price

100 years on, UN labour agency mission focussed on growing inequality, says Director-General

ECB to buy corporate bonds: Will government financing be the next step?

Last year, this coral reef was teeming with life. Now it’s dying – and it’s up to us to save it

EU budget: Commission proposes to increase funding to support the environment and climate action

Everybody against Japan over yen’s devaluation

An overview of the Tobacco Control Measures in India: problems and solutions

Warsaw wins 2020 Access City Award for making the city more accessible to citizens with disabilities

EU Youth Conference in Riga concludes with recommendations for ministers

Everybody against Germany over the expensive euro

How to tap the talents of refugees – one student at a time

‘Reasons to hope’ for sustainable peace in Central African Republic – UN Mission chief

The ECB proposes a swift solution for SMEs’ financing

How many websites are there?

Europe moulds global defense and security chart given US new inward vision

The Council unblocks all EU budgets

World faces ‘climate apartheid’ risk, 120 more million in poverty: UN expert

OECD presents revised Codes on capital flows to G20

Commission calls on Leaders to pave the way for an agreement on a modern, balanced and fair EU budget for the future

World Television Day celebrates an integral part of modern life

Turkey presents a new strategy for EU accession but foreign policy could be the lucky card

2018 Sakharov laureate Oleg Sentsov receives his award

Food system failures in our age of abundance

COP21 Breaking News: Conference of Youth Focuses on Hard Skills to Drive Greater Climate Action

Here are five ways we can make mental healthcare better

‘Harmonized’ plan launched to support millions of Venezuelan refugees and migrants

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

1.1 billion people still lack electricity. This could be the solution

The European Sting at the Retail Forum for Sustainability live from Barcelona

‘Growing alarm’ over Fall Armyworm advance, with cash crops ‘under attack’ across Asia

Final preparations for DCX and IFRA Expo 2019, in association with The European Sting

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