crisis, central-bank, euroSome politicians argue against ECB lending at 1% interest rates, which in turn lend to countries at rates from 3 % to 1x % .
They would prefer ECB to lend directly to countries.
I don’t discuss politics and the money that banks can make from the interest rate differential.
Rather, I see 2 aspects which you could please clarify for me :
EDIT – after @psatek answer, to clarify my question :
My question aims at understanding some basic aspects, not to grasp the full picture or assessing if it’s good or bad that ECB does not lend to countries directly.
First aspects is : does ECB lending to banks involves risk assessment of the banks ?
Second aspect is : is there some purpose behind it like “let the market assess solvency of countries” ? (that should be a root principle set at the birth of the eurozone)
I clearly have a very poor knowledge of economics, but i feel very frustrating that after so many months of euro crisis, so little has been explained by the media.
In short : don’t consider my question like an “expert question”, rather like a “dummy question” which calls for plain concrete answers. Thanks.
I think the issue is a very complex one with many reasons.
One of them being the one you didn’t want discuss so that the banks could make profit from the interest rate differential, as this would increase their profits making it less likely that they would require a full bailout.
To address your first point the money the banks make from the interest rate differential should make it more likely that the ECB get it’s money back.
It also removes the ECB from making the decision about how the money should be allocated in relation to the individual countries.
I think it’s impossible to remove the politics from the discussion as you could make the economic argument that the insolvent banks (and countries) should be allowed default/fail/collapse, but their are political reasons that make this something to avoid.
The ECB move was actually amply covered by the business media at the time.
There was for instance a witty and insightful article in the Financial Times a few weeks ago titled “Why the super Marios need help” by none other than Martin Wolf (18th of Jan) - the two super-Marios being of course Mario Draghi and Mario Monti.
As a matter of fact, under Jean-Claude Trichet’s leadership, the ECB dutifully complied in words if not in spirit with its statutes (carefully monitored from Berlin and Karlsruhe) by refraining from directly subscribing Eurozone government bonds emissions - no “Quantitative Easing” in the Eurozone being of course the fundamental rule (although CPI does not seem to be directly/significantly increased by QE but that’s a debate for another day).
The only intervention it allowed itself was to buy state bonds on the secondary market (albeit in significant amounts). This decision did have a slightly cooling effect on the short term credit tensions but it is now backfiring (see for instance the recent negotiations regarding the “voluntary” PSI (private sector involvement) conditioning the new Greek bailout).
Although this came as a welcome relief for European banks, state bond auctions where still largely shunned by cash-strapped investors, thereby resulted in unsustainably high borrowing rates for a large proportion of Eurozone countries. By offering refinancing to Eurozone banks at an average benchmark rate of 1% for three years (as opposed to one under Trichet), Mario Draghi created the conditions for these borrowing rates to become more sustainable. The ECB was taking the risk, not the banks. The risk is low anyway considering the foreseeable economic slump ahead.
Said otherwise he bought the Eurozone time, thereby allowing Eurozone governments to legislate and implement long delayed budget deficit reduction reforms. In other words, he shifted the battle for the Euro from the capital markets unforgiving time scale to the more convenient political one.
Future will tell how political leaders will take advantage of this opportunity and show enough courage and judgement to make the best of this short reprieve.
For now, one has to admit that there has been no shortage of triumphant declarations in many Eurozone countries falsely ascribing the decrease of borrowing rates to the fable that investors were suddenly convinced by the 12th of December umpteenth-last-chance-treaty. Aping in that matter, political leaders of QE prone governments who cite their reasonable borrowing rates as a proof of their sound financial situation.
Reading your question again, I think I might have drifted somewhat… Here are some more precise answers.
First aspects is : does ECB lending to banks involves risk assessment of the banks ?
I don’t think it is possible to assess which bank will have failed in 3 years time and which will not. However Bâle III imposes higher “Liquidity Coverage Ratio” and “Net Stable Funding Ratio” which in theory would decrease the risks of bank default or at least firewall them. And we all know that banks are currently doing all they can to collect savings and clean their balance sheets.
Second aspect is : is there some purpose behind it like “let the market assess solvency >of countries” ?
In effect, the banks are part of “the market”. And they do assess the risks. This is why there is still a spread between German rates and French or Spanish rates. The fact that the ECB has stepped in merely tended to dispel the irrationality factor (general defiance between banks => credit crunch) which would have smothered the real economy.
Disclaimer: I’m just a geek. So please feel free to amend to your heart’s content ;-)
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