Hamish McRae: How the ECB's big bazooka saved the eurozone's banks – and may again
TODAY we will know how many more euros the European Central Bank has pumped into the eurozone's banks in this second stage of its Longer-Term Refinancing Operation. Just before Christmas, it issued just under €500bn of three-year loans at 1 per cent interest and expectations this time range from some €250bn right up to €800bn. In December, LTRO – the brainchild of the new Italian leader of the ECB, Mario Draghi – was credited not just with saving some banks from going under but with turning round the position of several weaker eurozone countries, including, ahem, that of Italy.
The idea was, and is, to enable banks to fund themselves when they cannot raise enough deposits to do so. Banks in the weaker eurozone countries have seen deposits walk out the door. Over the past six months, Greek banks have lost nearly 13 per cent of their deposits, Portuguese and Irish banks 9 per cent, and Italian banks 8 per cent. By contrast, deposits in core countries, notably Germany and the Netherlands, have gone up as people and businesses switch their funds to what they perceive as safer banks and perhaps safer euros, too.
But if the idea was to enable banks to keep lending to customers, in practice a lot of the money ended up in eurozone sovereign debt. It makes huge sense for a bank if it can borrow at 1 per cent and earn 5 per cent on it by buying three-year Italian bonds. Indeed, I heard a story that the French government was in effect ordering at least one of its banks to use the LTRO money to buy French debt – the phone call strongly advising them to do so was made.