BlogSpot - June 16th, 2014
A few days pass, and analysts become more critical of the ECB monetary action
The ECB announced (see the ECB’s web site or the transcript of the press conference) an ambitious policy package to fight deflationary risks, and announced that further actions will be taken. Among others, EuroIntelligence and Brunello Rosa, in a Roubini piece, provide a nice summary of the main measures: (i) rate cuts, with a negative deposit facility interest rate; (ii) a new funding-for-lending scheme, ie., the Targetted-LTRO, focused on small-business lending and excluding mortgages, and to be conducted twice, in September and December; (iii) money market operations (extension of the main refinancing operations as fixed-rate full allotment tenders until December 2016; a new three-month LTRO; and the end SMP sterilisations); (iv) Asset Backed Securities, with a vague proposal to speed it up. No formal Quantitative Easing was announced.
Silvia Merler, in Bruegel, writes that the TLTRO can be a positive improvement, but with important details to be clarified. The new “Targeted” LTRO imports the “funding for lending” tested by Bank of England. The scheme works in two steps, with a first phase linked to the outstanding amount of bank loans to the non-financial private sector and a second phase linked to the flow of net lending. The initial allowance for credit, at 7% of the amount of banks’ outstanding loans to the euro area non-financial private sector (excluding households’ mortgages), will amount to roughly 400bn, almost equal to the decrease in loans observed since fall 2011. But things are very different at the country level, with most deleveraging happening in Spain, Italy and Portugal, though the TLTRO allocation will benefit first Germany, then France, Italy and Spain. For phase 2, which allows to leverage the instrument, she finds that it may be ineffective given that net lending has been negative in the euro area. Safeguards, to ensure that the funds are used for the intended purpose, will also be paramount.
Analysts are starting to question the usefulness of the ECB’s package in getting inflation back to its 2 percent target.
Zsolt Darvas, Grégory Claeys and Guntram B. Wolff (Bruegel) view the ECB’s package as significant but falling short of what is needed to bring inflation back to 2 percent: the package is about a slight easing of monetary policy and an attempt to improve monetary policy transmission by restoring the bank lending channel—and measures may have a limited impact on both. In the absence of a large scale ABS purchase programme and with subdued demand for credit, the impact on the exchange rate could be quite limited and an element is still missing: a monetary policy measure that would substantially kick-start inflation in the core euro area countries, e.g., a significant QE program.
Zsolt Darvas and Pia Hüttl of Bruegel note that negative deposit rate had no effect on lending in Denmark – though it did affect the exchange rate.
David Folkerts-Landau (Deutsche Bank, hat-tip EuroIntelligence) writes in Frankfurter Allgemeine that the policies does not address either of low inflation, weak credit growth and a strong euro; notably because the TLTRO is not truly targeted, with no conditionality on how banks use the money. In the Financial Times, Stephen King and Gavyn Davies both concluded that the ECB has not done enough.
EuroIntelligence reviews the negative comments about the ECB package, from Francesco Papadia wondering about how different is the TLTRO from the LTRO, to George Magnus noting that the ECB still hasn’t deployed the instruments the Eurozone economy requires, and lacks the political room for manoeuvre of other central banks.
Brunello Rosa, in a Roubini piece, argues that the package is a good beginning of a sequential approach to further easing but that the next step should come in short order in the form of QE.
Wolfgang Munchau (Spiegel) writes about the significance of Atif Milan and Amir Sufi’s House of Debt for the eurozone. Munchau speculates that the fall in eurozone lending is also largely driven by lower demand, as opposed to lower supply, and if this is true the ECB’s policies to incentivise banks to lend more may be misguided. FreeExchange writes that the ECB’s scheme bears more than a passing resemblance to the Bank of England’s funding-for-lending scheme, which failed to push up credit to firms—with net lending to British SMEs dropping in 2013.For firms, ungoing deleveraging will limit the impact of the measure.
The ECB package may also have important “side effects,” as highlighted in EuroIntelligence, especially on funding policies of emerging markets (which recently borrowed heavily in euro-denominated debt, and bank profits. On the latter, the International Financial Review writes that the TLTRO will boost bank profits more than the economy.
The Short View…
James Galbraith and Yanis Varoufakis propose a taxonomy of eurozone crisis resolution proposals, generally divided between austerity and treaty change proposals, while the battle for the Presidence of the European Commission rages on, as reported by RealTime Brussels, with Juncker still in the lead.
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