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.”
To embed this post, copy the code below on your site
have your say