Espirito Santo: Flight to quality

The Espirito Santo case also shows to what extent markets are becoming decoupled from current monetary policy stance and underlying economic performance scenarios. They tend to disregard Fed’s hints on a potential switch to higher interest rates next year. Tapering the asset-buying programme only attracted some attention when launched some months ago. Now, plans to overhaul the scheme go unnoticed.

The ECB liquidity spouts have utterly failed to impress the markets. The easy money outlook hasn’t driven the Euro downwards as many expected. Nor has it achieved a solid bulwark against instability. On face value, banks were supposed to cash fat benefits from drawing funds at historically low rates. Yet, their shares’ trading is tumbling across the board when confronted with a rather marginal setback.
Extensive losses point to deep mistrust on the ability to maintain a virtuous circle of increasing profits and balance sheet reshuffling. Investors fear that the current mild recovery will prove unable to enhance assets just-in-time before the incoming health check. Thus, suspicion is deeply rooted and surfaces as soon as any minor tumbling obstacle materializes.
It will prove a pain-taking exercise convincing the markets that the ECB is firmly committed to growth. Focusing on reference rates doesn’t seem enough to anchor an overhaul in investors’ sentiment. Eventually, it will be forced to tackle the irksome issue on how to deliver enhanced confidence. It has already spent most of its firepower by lowering interests close to zero and providing 1 trillion in a bold attempt to overcome the current credit crunch hitting small and medium-size companies, as well as households. Launching a vast asset-buying programme remains its only available weaponry. As resorting to this last ditch arsenal seems rather unlikely in the short run, investors cast a dubious view on its ability to enforce a full-fledged growth programme.
Berlin’s staunch refusal to allow money from leaking into public bonds adds up to further confusion. For, the sharp increase in periphery yields inflicts severe damage to real economy in these countries underlying the threats looming over their recovery. Sacrificing sovereigns on the altar of fiscal virtue only serves the purpose of further exposing ECB’s lack of independence. A most clumsy choice when growth is at stake.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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