Monetary policy at stake

While no one would contest liquidity supply is running high, failure in feeding credit-hungry firms and families comes under severe criticism. Blaming the financial system for failing to work properly stands as a poor excuse. It has never cast a tender look at borrowers. Claiming monetary policy is flawed neither serves as a plausible explanation for vindicating such a fund crunch. For, It overlooks the obvious fact that banks will hoard resources so long as they are confronted with the demanding hurdles future solvency requirements amount to. Refraining from granting money to third parties stands as the safest way for enhancing own funds. Governments having pressed hard for demanding capital ratios, as their top priority, cannot expect banks to keep their lending windows fully open.

Moreover, Governments have overtly enticed the ECB turning itself into their own banker. They readily endorsed tailor-made LTRO and liquidity expansion for fuelling a whopping demand in sovereigns. Solvency rules provided a lavishly preferential treatment to these assets. No wonder financial resources have secured a soft landing cushion for public debt while denying vital funds for anchoring private deleverage. Saving the Euro has worked as a smokescreen for salvaging public finances from their plight.

Ensuring skewed financial support for Governments involves a high price in terms of lower growth and mounting impaired assets. The more so, as low price environment turns deleverage into a far more demanding endeavour. It forces real adjustment to fill the gap, while financial costs become an increasingly awesome burden. Pressing banks to finance their shortcomings with no public support in sight adds fuel to the flames. In the absence of a robust backstop, the financial community is bound to parcel out credit further, entrenching itself from potential slippages. Don’t blame bankers for blatantly underperforming their job, when Governments act in such a selfish mood.

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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