Draghi strikes again – republica.com.uy

By Sonsoles Castillo, BBVA Research

The ECB did not disappoint and he announced a package of measures that exceeded expectations, already high

in an attempt to maximize synergies, the ECB takes action on three fronts. rate cut, expanding bond purchase program and the provision of liquidity to banks. This time, beyond the new rate cut, the novelty is in the last two steps.

First, regarding the purchase of assets, in addition to considerably increase the amount, extends coverage to corporate debt . From now on, the ECB may buy bonds of non-financial companies of high credit quality (investment grade). Thus, the ECB gives a qualitative step and goes into another territory that involves taking more risk. In addition to this decision opens a new valve, apart from banks, to try to revive the real economy, and can not be ruled out in the future, if necessary, the ECB extend purchases to other asset classes.

Second, in relation to the provision of liquidity, the announcement is also significant. The ECB offers banks liquidity operations to four years under very attractive financing (at a cost of 0% or even negative, to -0.4% if the credit is evolving very favorably). While liquidity is not currently a problem for banks, it is certain that this measure alleviates the concern of the sector on two fronts. The future liquidity and margins

Implicitly, the ECB is giving a clear signal: liquidity will not be a problem for banks and therefore should not be a problem for the financing of the economy. Thus, the measure contributes to peace in the current environment of high uncertainty and where banks face higher maturities. On the other hand, in an increasingly difficult environment for banks, threatened by the impact of the environment of negative interest rates on margins, the option to finance zero negative terms longer helps mitigate this effect types or.

in all, the ECB wanted to give a new twist to its strategy. A return comes at a time when the role of central banks is in the spotlight. While no one questioned that the measures taken by the ECB in recent years were necessary, as the measures are extended in time and the fragility of the economy persists, begin to emerge voices questioning the ability and the margin of the ECB to remedy the situation.

in particular, they are the dreaded “markets” that call into question the effectiveness of policies. And this is particularly relevant, because the expectations channel is the main lever with which central banks operate. Without trust, the effectiveness of the measures is severely impaired. Fully aware of the risk that this entails, Draghi responds well to the doubters. The ECB has left ammunition and willing to use

On the options, without explicitly mentioning it is clear that the central bank is each more inclined, rightly, to use unconventional measures (which would be for example the option of buying riskier assets) versus the option to further reduce interest rates again.

I say successful by the potential adverse effects that can generate this measure, both internally and externally. Curiously, when asked Draghi for the nuclear option “helicopter money”, he has not shrift, although as expected has appealed to issues of a legal nature to park this issue.

But, ultimately, doubt about the effectiveness of these measures is not dissipated so easily and recalls the fragility of the situation. Beyond this market volatility, there is a reflective background: it is possible that central banks left their ammunition, but it is increasingly evident that yields policies are decreasing and that the single monetary policy is lame.