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THE EUROPEAN CENTRAL bank has announced a €400 billion financing package in an attempt to force banks to inject more capital into the real economy.
At a press conference in Frankfurt this afternoon, ECB president Mario Draghi said that banks will be able to avail of financial instruments offered by the bank known as Targeted Long-Term Refinancing Operations (TLTROs).
The TLTROs are designed to force banks to lending to ordinary businesses, and their use will be limited to the non-financial and non-household sectors.
Danske bank strategist Owen Callan said that the ECB “has done everything that was expected or hoped for” since it raised the prospect of major action at its last monthly conference in May.
What will TLTROs do?
In essence, the ECB is trying to boost the amount of cash available to small and medium enterprises and other smaller corporates. Banks will be allowed to borrow seven per cent of their total loans from the facility at a fixed interest rate.
Draghi said that the package of measures is specifically designed to have an impact on the real economy.
He said the real success of the package would be if there was a “very sizeable financing inflow for the SMEs in the real economy”.
He said that loans advanced using the TLTROs would be closely monitored to make sure they were being lent into the correct sectors of the market.
Callan explained: “The TLTRO is a long term loan being extended to the banking system.”
He said that previous attempts to use the instrument had fallen flat as banks had used the facility to buy government bonds rather than to push it into the real economy.
Prospect of quantitative easing
The ECB will also consider what is effectively a package of quantitative easing – the injection of massive sums of money into the market to ease pressure through the purchase of asset-backed securities (ABS).
ABS are packages of loans – rather than derivatives – that have been advanced to the non-financial sector, similar to the loans that the bank is trying to promote through the use of TLTROs.
Draghi promised that any securities market would be “simple and transparent” and would not deal with derivatives, the trading of which has been blamed as a main cause of the financial crisis.
When asked if the ECB could deploy more weapons in its fight against low inflation, Draghi responded:
Are we finished? The answer is no. If need be, we aren’t finished here.
Callan said that the ECB sees the purchase of securities as a more efficient way of interacting with the market directly in the long term.
Impact on trackers
Earlier this morning, the ECB confirmed that it will cut its base interest rate by 0.15 per cent, reducing marginally the cost of a tracker mortgage.
According to John Lowe of moneydoctor.ie, the new rate cut will mean a saving of €15.97 per month on a €250,000 mortgage, or €191 per year.
It’s not massive but it’s a bloody good meal out and a nice bottle of chablis or similar.
He said that customers of AIB and PTSB, whose mortgage books consist of around 60 per cent in trackers, are in line for the bonus.
“What we have now are some mortgage holders with a total interest rate on their mortgage of 0.6 per cent. You can be fairly sure the 0.15 per cent decrease will not be passed on to the standard variable rate mortgage holders.”
Negative rates
In addition to this, the bank has strayed into a negative rate on the deposit facility offered to banks, meaning that banks will in fact have to pay Frankfurt to leave money there.
The measure is again designed to encourage more lending among banks who may have been more comfortable to sit on their cash piles rather than advance money out in loans with risk attached.
Callan said that this is likely to impact more on conservative core European banks rather than Irish banks.
Forecast revised downwards
The ECB also revised downwards several economic projections for the next few years. Most notably, it said that it was cutting its expectations for inflation rates for 2014, 2015 and 2016.
The ECB now reckons that inflation will rest at 0.7 per cent this year, before growing to 1.1 per cent in 2015 and 1.4 per cent in 2016.
Despite sluggish inflation, Draghi said that he did not see a threat of deflation as he argued that households are not yet putting off spending in a classic deflationary spiral
Of the recovery, he said that it is “fragile, uneven, but it’s there”.
He said that fiscal consolidation is making progress, although again he called it “”uneven and far from complete”.
“Euro are countries should not unravel progress made with fiscal consolidation”.
He denied a charge leveled by an association of German bankers, who traditionally are hostile to big interventions in the market by the ECB, that his actions are a “disincentive to structural reforms”.
Ireland
Responding to questions from Irish journalists at the press conference about Joan Burton’s view that the limits of austerity had been reached, Draghi said:
“One of the reasons for this crisis was that condition in which many countries’ budgets were at the beginning of the crisis…we don’t want to go back to that situation.”
He said that a “growth friendly fiscal consolidation” was possible, a situation Callan described as a “dream scenario…which would be difficult in an Irish context but can be done if it’s done in the correct manner.”
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its funny how he can inject 400 billion into the economy of europe at the stroke of a pen and when we went looking for a 64 billion write off we were told that it would have to be paid as it would have a huge effect on the euro…one law for them!
Well said Sean.
The Euro currency union was deliberately designed to allow the markets to profiteer from member state sovereign debt. It’s really only the Eurozone countries that are required to borrow their own currency in the market at an interest rate determined by the market. Fiat currency issuing nations like the U.S and U.K do not need to obtain their own currency in the market to finance a budget deficit for example.
The U.S. does not ‘borrow’ dollars in the normal sense of the word. They are in reality offering a risk free, interest bearing, deposit facility for the large financial institutions and the ultra wealthy. This is actually what the government ‘bond’ market really is, a very favourable service to the banking & finance sector.
When they do choose to issue government bonds the primary objective is to implement monetary policy, not as a necessity to raise revenue. In addition, when those countries do ‘borrow’ in the market, they effectively decide what the yield/interest will be unlike the Eurozone nations subject to the tender mercy of the speculators.
If they wished, the Federal Reserve and the Bank of England could simply create as much money as their host nations require by pressing keys on their central bank computer. In practice, they are a little more discrete in their money creation. The usual mechanism is that the government will issue new bonds and ‘sell’ them to the commercial banks etc. A government selling its bonds reduces the total money supply, and so tends to increase the market interest rate, as the central bank reserves (base money) held by the commercial banks are exchanged in return for the government bonds.
In the reverse transaction, the central banks ‘buy’ the previously issued government bonds in return for central bank reserves in an asset swap. This has the effect of increasing the money supply and so reducing the interest rate to try and stimulate economic activity as has been seen in the massive Quantitative Easing programs of the past few years.
The central bank reserves are created electronically at will on a keyboard by the central bank as necessary to maintain liquidity in the interbank market. In this way a sovereign country can never really default on its own currency denominated debts as the central bank can always ‘buy’ back that debt with newly created central bank reserves which every commercial bank requires to function.
In contrast, the Euro single currency was deliberately designed to allow speculative financial capitalism to profit massively from member state sovereign debt as monetary policy is now in the hands of the neo liberal ECB instead of democratically elected governments.
The Austerity program imposed by the ECB/EU & IMF Troika and 2 successive governments is achieving exactly what it was designed to do. That is to dismantle the social support structures like Health and Education and drive down the wages, working conditions and living standards of ordinary people to pay for an economic crisis caused by the capitalist elite. Draghi propagates the neo liberal lies above to justify this great robbery. (Have you forgotten Mario that Ireland was actually running a budget surplus for the 5 years leading up to the bank bailout in 2008?)
Draghi and his kind peddle the economic fairy tale that nations need to ‘balance the books’ to validate their austerity agenda. This is nonsense in a macro economic context. Most countries run a budget deficit most of the time and always have done. There is no shortage of fiat currency for those granted the power to create it. Vicious austerity is applied to the people of Ireland, Spain, Portugal and Greece under the false doctrine of Austerity and the illusion that there is somehow a shortage of Euros. In contrast the ECB has already created a trillion euro out of fresh air (to be followed by this additional 400 billion) in the past few years and lent it to the European banks at extremely low interest rates. As mentioned in the article, the Irish banks responded to this injection of cash by largely refusing to lend it to viable businesses. Instead they purchased Irish government bonds yielding a much higher interest rate precisely because the Irish sovereign was a much higher risk due to the private illegitimate, odious bank debt imposed on us due to the collapse of those self same Irish banks. Austerity is for the little people not the capitalist elite. It’s an ingenious neo liberal Catch 22 and we are the chumps.
Phew!
I had to come up for air halfway through that post! ;-)
Very well written though.
You have stated it clearly, but let me cut to the chase Germany in the South of Europe would fall apart if they devalued the currancy hence we are doing what the japanesse done for twenty years. Reduce wages, grow the economy at a slower pace. Another fact of this is Germany won’t allow the Euro to be devalued and if this was done the economic out look would grew faster. But We need to leave the Euro if the Germans don’t. Draghi can keep playing Russian Roulette with peoples life styles and taxes. I believe we better start thinking about getting off Draghi merry go Round spun by the Germans.
“”Will you walk into my parlor?” said the spider to the fly;
“‘Tis the prettiest little parlor that ever you did spy.
The way into my parlor is up a winding stair,
And I have many pretty things to show when you are there.”
“O no, no,” said the little fly, “To ask me is in vain,
For who goes up your winding stair can ne’er come down again.”
There you have the EUSSR described in a little poem, read the rest at
http://www.ocf.berkeley.edu/~aathavan/poems/The%20Spider%20and%20The%20Fly%20A%20Fable.htm
They are not the same thing Sean South.
Write-offs reduce a banks reserves, new loans increase the money supply.
This is good for everyone:
1. Increased money supply from the central bank will increase the supply of money into the economy
2. As banks lend more money, more money will come back into their reserves, and they can lend more money. The multiplier effect isn’t what is was in the days of cowboy reserves, but this still creates money in the system.
So while this 400billion will be inflationary, a sovereign debt write-down is deflationary. One will vastly increase the amount of money in the system, one would reduce the amount of money in the system, something the ECB is mandated to avoid. This is also reflected in the negative deposit rates policy.
The message is simple: “We’re happy that the banks are solid under our new monitoring measures, so here’s some cash to lend out. If you don’t lend out money, it’ll cost you to deposit it with us”.
@ Coddler. There many inaccuracies in your observations.
Depending who you talk to the Euro was designed to mimic the US dollar and/or shelter EU nations from dysfunctional US monetary policy. For the past 4 decades US affluence has risen even though the US did not have a trading surplus in that period. Ultimately, the founders of the Euro hoped that the Europeans could enjoy a similar free lunch. A free lunch that developing nations have paid for in malnutrition and deprivation.
The Fed is a privately owned institution. The Bank of England is state owned. The ECB is owned by the Central banks of the Euro area- basically a public institution. Wall street banks profit from the Fed and help direct its monetary policies.
All central banks are forbidden to monetise debt in theory (ie. Central banks are forbidden to buy bonds directly from treasuries.) In practise, government treasuries sell their debt/bonds on the bond markets. Central banks then purchase bonds from the bond market.
The US and UK have used this mechanism to circumvent the ban on purchasing their own governments bonds. The ECB relaxed the ban to benefit bankrupt PIIGS nations.
The system does not exist to benefit speculators. Speculators exist to allow central banks to circumvent their own rules that have been in place as a response to the last economic depression.
Sean,
If the U.S. government ordered the Fed to buy U.S treasury bonds directly tomorrow, that is exactly what it would do as it would have no choice. In fact the U.S. Treasury could dispene with the Fed entirely and simply create electronic dollars as it wished. No central bank in independent of it’s host nation and no force on earth could forbid the U.S from taking the steps just described if it chose to do so. Fiat currency is not a finite resource and is created and destroyed at will by sovereign nations who control their own currency.
Nicely said.
Loans increasing money supply? That’s money as debt = slavery. Slavery isn’t the solution to slavery. Try again.
€60 billion of that he owes to Ireland.
Sweet. It’s all going to fall into place now.
More financial tinkering before the inevitable collapse. Mario Draghi has infinite money!
I don’t know what a tracker mortgage is!!
Watch banks buying gov bonds at much higher rates than the ecb rate. Its what they did last time (see gov cheering about how its sold a load of bonds) /cynic
Nope, TLTROs wiil only be used to purchase securities back by loans to none financial businesses, i.e. finance for business.
a programme with 5 initials….I am impressed
Where are the ECB getting the 400bn funding or is this just QE with a fancier name? Between this & the bond buying schemes, the ECB seems very cash rich in a very cash poor environment.
It is QE. They are creating €400 billion of new money to refinance money that they have already put into the market. In total it’s about double Irelands soveriegn debt.
Thanks Ben. Disgraceful that inflation can finally motivate them to do this while the economic & social collapse of Ireland, Greece & Portugal only managed to extract finger wagging.
To add, it is a lot more than double our national debt. With cap ratios of 6% proposed by the ECB, you get a money multiplier of 16.67, so 400bn QE equals over 6.5trn injection. We have been punished for 6 years over 65bn! And all because the crisis might finally impact on the French & Germans!
“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Ludwig von Mises
I was under the impression that the money Ireland pays back to the ECB is going to be destroyed (burned, shredded, taken off the books, deleted) to help put the brakes on inflation–isn’t that what we were told?
And now we see that they are actually promoting inflation by QE.
I have a simpler solution and I bet you can guess what it is…
There are a number of theories that underwrite the issuance of state currencies.
Traditionally, the quantity theory of money. This advocated that sensible proportions needed to be placed on the quantities of currency issued to ensure that monetary policy did not have an adverse effect on the economy (e.g. result in periods of boom and bust)
This theory was gradually replaced by the Real Bills Doctrine during the 20th century. A theory that was originally born in the early 18th century with the birth of the Mississippi bubble.There are a number of variations of the RBD, but the premise, basically, is that banks and central banks can keep issuing currency as long as consumers, companies and governments wish to borrow currency. In other words, the limits of monetary expansion are defined by the securised debt saturation point of a nation.
Central banks have now passed the point at which currency can be issued as securised debt. The reality of this is a very large and destructive unwinding is imminent. Borrowers cannot repay their debt. Banks and central banks cannot issue sufficient quantities of new debt based currency.
As an additional impediment, under the RBD the quantity of currency (hence the quantity of new debt) must perpetually increase to maintain economic stability.
The solution central banks are opting for, now, is an un-securised debt issuance of currency. Sometimes called Weirmar or Mugabe economics.
We are living in very interesting times.
There are many that warned that once the QToM was abandoned this was always going to be the point we would arrive at. Whatever route was taken.
Correction: the Real Bill Doctrine is not a theory (never qualified), but more correctly is a hypothesis or article of faith.
So now you have to pay a bank a percentage of your money to hold it there. Come again?
Basically, the banks win again!
Only if you are a bank depositing surplus funds with the ECB.
If they print it as new money it will lower the cost of the Euro, making European and Irish exports cheaper in the UK and US and all other non Euro markets, good for Irish manufacturing and exporters
If they opt for easing now having already left us, Greece & Portugal out to dry there will have to be massive debt restructuring. They’ll quickly enough turn on the printing presses to support inflation, but there was outright refusal when it was for minor matters like member states being able to maintain functioning health services, or to hedge against economic collapse of the less relevant EZ states – it seems some still are more equal than others in Europe.
Possibly to little to late….
Too and too
equals four ?
Awful news for variable customers who will have to subsidise the tracker folk. Double screwed.
How is it awful news? There will be no rate increase for Variable customers on the back of this? In fact, this should increase the bank’s margin slightly on SVR, so they won’t need to come after mortgage holders for another 0.25% any time soon. The quicker your bank returns to profitability, the quicker the rate they borrow money at will come down, and the quicker you’ll see a better rate.
I’ll be a variable rate customer myself very soon and I’m going into the contract with my eyes open. You can sit around begrudging those that signed up for good deals, but ultimately spent too much on their houses, or you can watch your own house.
Indeed … sick of it.
@ROS lower interest rates right now are seemingly great (short term) news for borrowers but not really. The increases in the cost of living through speculation by massive borrowing more than offset any advantages to the overall economy.
Yawn . . . . .
If you’re tired you should toddle off to bed instead of reading the Journal…
All i know is tracker mortgage holders get more of a break while the rest get screwed again.
Firstly…..Asset backed loans that are not derivatives…..but will have the same effect as derivatives on the banking industry and the economy ….when the assets value falls off a cliff….duh?
Secondly……no sense of crisis here then. We won’t know if any of these measures will have any effect for at least a year when presumably there will be a whole group of other events and effects on the economy that will make it unclear what if any effect the measures have had.
Draghi.. Ex- Goldman Sachs right? Just like Irish ex attorney general (current head), Greek PM, US treasury secretary 2008 crisis and on and on. Currently “advising” Eircom on new flotation, GS gets legally fined on a continuous basis for criminal activities. This is a mere business expense for them. How anyone can take these clowns seriously is beyond me. It saddens me to think that people are so downright evil & stupid.
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