Throughout his waning months in office, European Central Bank President Jean-Claude Trichet boasted that he had avoided the excesses of his counterparts at the U.S. Federal Reserve and kept the ECB’s response to his continent’s financial crisis relatively modest.
It has taken his successor, Italian central banker Mario Draghi, less than three months to upend that approach, triggering a debate about whether the ECB has quietly solved the euro-zone debt crisis or simply postponed a reckoning by shuffling hundreds of billions of dollars among banks, governments and the central bank’s own coffers.
It has taken his successor, Italian central banker Mario Draghi, less than three months to upend that approach, triggering a debate about whether the ECB has quietly solved the euro-zone debt crisis or simply postponed a reckoning by shuffling hundreds of billions of dollars among banks, governments and the central bank’s own coffers.
As it did in December, the ECB this week is again offering inexpensive three-year loans to euro-region banks. Market analysts expect the central bank to provide new loans worth a trillion dollars or more, putting the ECB on a fast track to catch the Fed.
The policy has stabilized European finances in recent weeks, contributing in a roundabout way to a decline in the exorbitant interest rates that some heavily indebted governments had to pay. After the first round of ECB loans, banks spent some of the money on government bonds, and Italy and Spain as a result saw a drop in the cost they had to pay to attract bond investors.
The banks also began to retire their own bonds, reducing the competition for money on private markets. And bank lending to households and businesses ticked up.
These were all reassuring developments after an autumn consumed by fears that the region’s debt crisis would lead to a breakup of the euro zone.
“There are tentative signs of stabilization,” Draghi said at a recent news conference on ECB policy.
But some analysts and bankers are warning that the policies under Draghi could leave the European financial industry addicted to cheap ECB loans that will be difficult to replace if the region’s economy remains stagnant.
For a variety of reasons, the euro zone remains in trouble. The region is heading into recession, and governments are scrambling to restructure economies ill-suited to compete globally or support the costs of aging populations.
Greece, the region’s hardest-hit country, is in the midst of a bond restructuring that will shape its future. If all goes smoothly, the exchange of new, less-expensive bonds for older ones will greatly reduce the country’s outstanding debts and pave the way for a large package of new international loans. But the debt restructuring has left the country in technical default on its bonds, possibly triggering the insurance payments to bond holders — a development that some analysts worry could stigmatize the euro region for years.
If nothing else, the ECB loans have bought time and helped the currency union through a bulge of borrowing required by governments and financial companies in the first months of the year.
The ECB lending program was launched at a critical moment, when borrowing costs for Spain and Italy were at such a high level that they might have needed a bailout that the rest of Europe and the International Monetary Fund could ill afford. As those rates have dropped, Spain has actually accelerated its borrowing for the year to take advantage.
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The policy has stabilized European finances in recent weeks, contributing in a roundabout way to a decline in the exorbitant interest rates that some heavily indebted governments had to pay. After the first round of ECB loans, banks spent some of the money on government bonds, and Italy and Spain as a result saw a drop in the cost they had to pay to attract bond investors.
The banks also began to retire their own bonds, reducing the competition for money on private markets. And bank lending to households and businesses ticked up.
These were all reassuring developments after an autumn consumed by fears that the region’s debt crisis would lead to a breakup of the euro zone.
“There are tentative signs of stabilization,” Draghi said at a recent news conference on ECB policy.
But some analysts and bankers are warning that the policies under Draghi could leave the European financial industry addicted to cheap ECB loans that will be difficult to replace if the region’s economy remains stagnant.
For a variety of reasons, the euro zone remains in trouble. The region is heading into recession, and governments are scrambling to restructure economies ill-suited to compete globally or support the costs of aging populations.
Greece, the region’s hardest-hit country, is in the midst of a bond restructuring that will shape its future. If all goes smoothly, the exchange of new, less-expensive bonds for older ones will greatly reduce the country’s outstanding debts and pave the way for a large package of new international loans. But the debt restructuring has left the country in technical default on its bonds, possibly triggering the insurance payments to bond holders — a development that some analysts worry could stigmatize the euro region for years.
If nothing else, the ECB loans have bought time and helped the currency union through a bulge of borrowing required by governments and financial companies in the first months of the year.
The ECB lending program was launched at a critical moment, when borrowing costs for Spain and Italy were at such a high level that they might have needed a bailout that the rest of Europe and the International Monetary Fund could ill afford. As those rates have dropped, Spain has actually accelerated its borrowing for the year to take advantage.
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