Mario Draghi’s Announcements: The ECB Puts on a Show by Philippe Herlin, GoldBroker.com.

Mario Draghi came out with several announcements on June 5 which have been very well received by pundits. These measures are supposed to encourage banks to make loans to businesses and, thus, help in sustaining the recovery. Let’s see what these measures really entail.

Many of the announced measures are purely anecdotical, even though they are « firsts », like lowering the base rate to 0.15% (the lowest rate ever reached by the BCE), when it was… 0.25% just before. What is this going to change? Nothing, of course. Another « first » : a negative deposit rate of -0.10%. Banks will now have to pay (just a little) to park their cash with the BCE. Okay… but if banks choose to park some of their liquidities with the BCE instead of loaning them out, as it should be the case normally, to other banks (this is the interbank market), it just means that they don’t trust their peers, that they fear their default and, consequently, the loss of loaned out sums. The ECB decision will not change a lot of things, albeit encourage them to put more of that money into stocks and, thus, keep this bubble going…

After those cosmetic measures for media coverage, it is time to tackle serious business : New LTROs (Long-Term Refinancing Operations), i.e. gigantic loans to banks with reduced rates. The ECB is talking about 400 billion euros… serious business, I’m telling you. The ECB didn’t have a choice : The first two 500 billion euro LTROs date from December 2011 and February 2012 and were for three years. They are coming due in December 2014 and February 2015, and everybody knows that italian and spanish banks, notably, that have gobbled a large part of those loans, cannot reimburse them all. The ECB is, hence, just putting on a show and, what’s more,is offering better conditions (four years instead of three, and 0.25% interest instead of 1%). Champagne! Or, rather, Prosecco and Porto! We have explained several times (in this article, for instance) that the ECB would have to rollover the debt of european banks… here we are.

These very advantageous loans will be tied to the amount of loans the banks will have made. In other words, the more a bank makes loans to businesses and helps with growth, the more it will be able to draw from the LTRO, the ECB explains. We think that this is just sugar coating so as not to scare the Germans, who are never too keen on printing money, and also to please the keynesian governments in power in most Eurozone countries (the French government loudly applauded these measures). This way, failing banks may continue to stay afloat with their rotten loans.

To top it all off, the ECB reaffirmed its forward guidance of keeping interest rates at the lowest « for a long period of time », which assures us of an accommodating policy for quite a while… All of this shows that the european banking sector is still ailing and that the ECB has to keep it under perfusion. But by making believe these measures will jumpstart growth and recovery, Mario Draghi has proven he is a top communicator. What an actor! Bravo!

GoldBroker.com