Draghi steps in to help banking system but says eurozone is on its own
Published 09/12/2011 | 05:00
THE European Central Bank yesterday launched a major package of new measures to rescue the banks from another credit crunch -- but ruled out unleashing the same firepower to ease the eurozone debt crisis.
The news created a stark backdrop to today's crunch meeting of European leaders, a gathering where ECB president Mario Draghi said it was "fundamental" that politicians finally "deliver progress".
The ECB's long-held claim that it is up to politicians not central bankers to solve the massive problems facing Europe's economy was repeated by Mr Draghi yesterday, as he ruled out taking a more active role in resolving the crisis. The ECB can create unlimited money in theory and some hoped it would use this power to ramp up its purchases of the bonds of struggling countries, so that those countries borrowing costs wouldn't soar out of control.
Others suggested the ECB could act indirectly, by lending money to the International Monetary Fund (IMF) so that the IMF could use that money to help Europe. Yesterday, Mr Draghi ruled out both actions. The ECB's bond-buying programme could not be of "infinite size", he said, as he rejected the idea that the ECB would prevent the interest rate of bonds spiking above a certain level.
The ECB or even national central banks will not finance IMF activity in Europe because it would be "legally complex" and against the "spirit of " the ECB's governing treaty, which rules out funding member states, Mr Draghi stressed.
The news triggered falls in stock markets, reflecting investor hopes that the recent escalation of the crisis would have prompted the ECB to adopt a more flexible approach. The same criticism could not be made of the ECB's efforts to diffuse the banking crisis, however, as Mr Draghi unleashed an unprecedented arsenal to avert another credit crunch.
Banks can typically borrow money from the ECB for three months -- yesterday, Mr Draghi announced money would be offered for 36 months to give banks certainty over their future funding. The ECB is also relaxing its requirements for the collateral banks will have to post to draw down Frankfurt money or money from their national central banks, so access to cash will be easier than ever. And the ECB is halving the amount of money banks have to keep on deposit at their national central banks and reducing the amount banks pay to borrow from Frankfurt.
Mr Draghi repeatedly stressed that the measures were designed to ensure Europe's banks were able to lend to households and companies.
Irish banks have a relatively high dependence on ECB money but the impact of yesterday's banking package is unlikely to be dramatic. The Department of Finance last night said it welcomed "the introduction of longer term funding from the ECB, which is an approach that the Government has advocated" but declined to comment further.
Banking sources said the longer term funding would be "helpful" but stressed that banks are still mandated to reduce their ECB borrowings.
Bankers and analysts both said the new measures would not be a "game changer" for lending to Irish households and businesses, particularly since banks say they are already willing to lend but are faced with insufficient demand.