Will ECB credit boost work?

Who might disregard such a golden opportunity to lower funding costs? The more so as the only risk lies in failing to meet an easy-to-reach benchmark. Banks having expanded their targeted lending over 12-month until April 30 are simply required to stick to that level. Those contracting credit allowances can keep their current downward trend in 2015 while maintaining that low standard in 2016. Failure to do so entails no further penalty than early repayment in two years’ time.

There is more to come in the near future. Over the next 2 years, banks performing better than their comfortable benchmark will be allowed to cash three times that balance. The ECB hopes to channel further €600 billion into credit-starved firms and individuals.

On face value the plan looks impressive. Yet, while cheap money stands as a vigourous enticement for enhanced consumption and investment, the low-motion recovery acts as a powerful brake on spending. Moreover, economic agents across the board are undertaking relentless moves for implementing widespread deleverage. The new facility will undoubtedly lure debtors to refinance their outstanding liabilities. But until robust economic growth propels demand, net lending will keep its current underperforming trend.

Banks are also unlikely to switch their focus on disinvesting and abating risk exposure. Especially when demanding health checks push them to increase capital and reduce balance sheets. The Banking Union couldn’t be enforced in less favourable conditions. Instead of focusing on growth, Europe bet on tidying up the financial system. Failure to acknowledge that banking  woes are closely linked to economic performance is to blame for the deeply rooted credit crunch. The ensuing plight in demand and output turned into a vicious circle by futher deteriorating banking balance sheets.

Let’s hope the ECB liquidity flood reverses that trend. For all the well intentioned and forceful efforts Mr Renzi might accomplish under his EU chairmanship, Mr Draghi still holds the only effective key to recovery.

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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