The ECB's 'Whatever-It-Takes' In Action
Ed Yardeni | Jun 12, 2014 12:46AM ET
Last Thursday, the ECB lowered its official interest rate by 10bps to 0.15%. The rate paid on bank reserves was lowered to minus 0.1%. There isn’t much firepower in these lame actions. In addition, the ECB announced that cheap loans, possibly worth up to €400 billion, would be made available to banks under a program of “targeted long-term refinancing operations.” This TLTRO is aimed at providing more credit to small businesses. The 6/9 Financial Times notes that it will take some time for this program to “provide an economic stimulus to those parts of the eurozone most at risk of falling into a dangerous deflationary spiral.” I agree.
Of course, the ECB also hoped that its new policy package would lower the foreign exchange value of the euro. So far, it hasn’t done much. The euro is down from a recent high of $1.39 to $1.35 currently. On July 26, 2012, ECB President Mario Draghi pledged to do whatever it takes to defend the euro. He succeeded all too well because now he is struggling to weaken it.
He also succeeded in stabilizing the banks. His 2012 pledge gave the banks the confidence to load up on sovereign bonds, especially those of the peripheral Eurozone countries. As a result, bond yields plunged, with the Spanish Spanish 10-Year yield now equal to the U.S. 10-Year Treasury yield. Unfortunately, while the banks have been loading up on bonds, they’ve reduced their loan portfolios. That’s because they are subjected to regular stress tests that make government bonds more attractive than loans.
Today's Morning Briefing: Credibility Issue. (1) The first lesson in investment school. (2) Another record for stocks. (3) Bazookas turning into Pea Shooters? (4) ECB’s latest package isn’t “whatever-it-takes.” (5) Euro remains strong. (6) PBOC using rifle rather than shotgun. (7) Is deflation moderating in China? (8) BOJ’s QQE may be losing its effectiveness. So pensions will buy shares. (9) Is the Fed on the right or wrong side of inflation? (10) Feldstein’s warning. (11) Four reasons why stocks fell yesterday, and why they matter.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.