Wednesday 21 March 2018

Jeremy Warner: Will the great interest rate gamble pay off?

By flooding the system with 'free' money, the central banks could be storing up trouble, writes Jeremy Warner

Mario Draghi took over
at the helm of the
European Central Bank
last November.
Mario Draghi took over at the helm of the European Central Bank last November.

Jeremy Warner

In practice, he's proved anything but. Since arriving at the ECB, Mr Draghi has engineered a sort of Club Med putsch, sidelining the German hawks and embarking on the kind of unconventional monetary activism that for several years now has been the hallmark of the US Federal Reserve and Bank of England. He's been bold, and he's been decisive.

And it appears to have worked. In promising unlimited funding to Europe's stricken banks, he's very likely saved the Continent from the Lehman's moment for which it was undoubtedly heading. Both Spain and Italy have also found it easier to fund themselves in financial markets, and spreads have narrowed. Banks have been encouraged to borrow cheaply from the ECB to buy higher-yielding government bonds -- the "Sarkozy carry trade" -- which in turn has allowed countries to finance themselves less expensively. By the time this month's auction is over, the ECB will have doled out nearly one-and-a-half trillion euros of "free" money to help keep the banking system alive, with much more to come over the months ahead.

Nobody is under any illusions. These actions have not succeeded in vanquishing the crisis. Underlying structural issues remain unresolved, and it is most unlikely that the starvation diet to which much of the eurozone periphery has been condemned will result in robust recovery. But Mr Draghi has at least prevented the patient from dying on the slab. Two cheers for that.

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