lunes, 8 de abril de 2013

lunes, abril 08, 2013

April 7, 2013 6:53 pm

The ECB’s priority should be to fix southern Europe

By Wolfgang Münchau

Mario Draghi should prioritise the unconventional over the conventional
 
The giant Euro symbol stands illuminated outside the headquarters of the European Central Bank (ECB) on November 5, 2012 in Frankfurt, Germany. Analysts are predicting that ECB President Mario Draghi will announce in a press conference scheduled for November 8 that he will leave ECB interest rates unchanged despite continued weak economic data coming from many Eurozone economies©Getty


The eurozone economy is stuck in a long and drawn-out recession. It will probably continue for the rest of the year. Unemployment has reached a eurozone-era record of 12 per cent, and will probably rise further. Inflation is at the lower end of the target range, and projected to fall. The risks to growth and inflation are both on the downside. So why on earth is the European Central Bank not cutting interest rates?

This is a legitimate question, and an important one. But the most important question facing European monetary policy is how to fix the credit crunch in the southern half of the monetary union.

Nowhere is the situation more acute than in Italy, where small and medium-sized companies are being hit by austerity and the credit crunch at the same time. Mario Monti’s administration in Italy implemented austerity in such a way that it has prevented municipalities and other public entities paying bills to their suppliers. This has turned into an existential threat to the survival for many small companies, which face the simultaneous problem of not getting paid and not having access to credit to tide them over. Small Italian companies typically face interest rates of 10 per cent. Over the border in Austria, similar companies get credit for less than half that rate. Italian households, too, are credit constrained, as lending for mortgages and consumption goods has been steadily falling, and rates rising.

Unlike in Italy, the fall in bank lending in Spain is mostly demand-driven. In Spain, lending to households was down 4.4 per cent year-on-year in February, while lending to firms was down by 10.6 per cent. Spain is the classic example, along with Japan in the 1990s, of a balance-sheet recession where the private sector deleverages irrespective of the level of interest rates. But even for Spain I would expect that a targeted programme to reduce the interest-rate premium would bring higher returns than an overall quarter-point rate cut.

I am not against a rate cut. On the contrary, I think the ECB should cut policy rates to zero to counteract the fall in aggregate demand. But while this would have a small positive effect on average monetary conditions, it will be less effective than a programme designed to reduce real-world lending rates.
 
A recent IMF working paper by Edda Zoli found a link between the size of the sovereign spreads and the funding costs for Italian banks, and ultimately, the rise in corporate borrowing costs. The high sovereign spreads thus indirectly created credit supply constraints in the private sector. But the process did not seem to have worked the other way round.

Mario Draghi, president of the ECB, tried to fix the problem last year with the launch of a sovereign bond purchasing programme, known as Outright Monetary Transactions (OMT). It triggered a fall in sovereign bond spreads, but, unfortunately, had no effect on transmission mechanisms. On the contrary, they have deteriorated.

Last week, Mr Draghi said he was “thinking 360 degrees on the non-standard measures”. It looks as though he is up to something. What can he do?

I could think of three options in rising order of firepower:

First, the ECB could find a way to provide direct incentives to banks to lend money. It might relax collateral requirements for various classes of asset-backed securities, or extend an existing programme to allow bank loans themselves to be posted as collateral. But do not hold your breath – this programme has not been very successful so far.

Second, he could backstop a massive lending programme to be spearheaded by the European Investment Bank to co-finance loans to small and medium-sized companies. For this to work, it would have to be big, uncharacteristically fast and unbureaucratic.

The third, and most radical, action the ECB could undertake is to purchase corporate bonds on the primary and secondary market, thus funding companies directly, in addition to purchases of covered bonds. A corporate bond purchasing programme may not help the smallest companies, though there is no reason in theory why they should not issue bonds for the ECB to buy. Some combination of the three measures may well do the trick.

Would this be legal? Of course it would. The ECB has a legal mandate to target price stability. It is not allowed to monetise government debt. But it is allowed to fix the transmission mechanism of its own policies. The obstacles are more political than legal. I have doubts whether the Bundesbank and other northern European central banks are willing to go along with this. They have argued in the past that it was the responsibility of member states to fix their own banking systems.

So this is ultimately a conflict about banking union. A fully-fledged banking union would constitute a necessary and sufficient solution to the credit crunch problem. If you sever the link between Italian banks and the Italian state, then there should be no reason why Italian companies pay higher interest rates than their northern European equivalents.

To get anything done, Mr Draghi will once again have to organise a majority against the Bundesbank. This is possible, but he may find his political capital is finite. In that case, he should prioritise the unconventional over the conventional.


 
Copyright The Financial Times Limited 2013.

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