With the likelihood that a new LTRO will be watered down in its use as a liquidity measure, there’s noises afoot that the ECB may go down the route of the UK and look to offer a “Funding for lending” scheme or other direct-to-economy injection. It’s pretty plain that the ECB do not want to just pump the banks again then have it coming right back to them on deposit, nor will they want to see the money put elsewhere on ice. So is it a good idea?
On the face of it any sort of cheap, secure liquidity that can be given to the economy is a good thing, setting the ground rules for such a scheme is also good news. Take the UK’s FLS which controls both the price and quantity of funding provided linked to banks lending performance. However, as we keep pointing out there’s several problems and hurdles. The first big question is why the banks can’t do this in the first place instead of the ECB having to step in? Secondly, will bypassing the banks show up any glaring holes still around in bank liquidity and thus problems with capital and balance sheets that have been papered over with the previous LTRO’s? Thirdly, why is the ECB responsible for this and not national states?
On an economic level is there actually decent demand from SME’s for funding? Yesterday Vitor Constancio said that the the weakness in bank lending was more down to lack of demand than supply.
The other argument is that we’ve been constantly told that debt fuelled growth is not the road we want to go down again. While that may be true on a sovereign level shouldn’t that also count on a main street level? Businesses need credit, that’s a given but shouldn’t there be better programs or policy designed to boost companies without having to lead them to the debt trough. Surely tax incentives and cutting red tape would yield greater and quicker returns allowing companies to expand, take up the slack and hire new workers.
What we do know with Europe is that whatever they decide will take an age to implement. They’ve pulled the trigger on LTRO’s before so there’s no delays if they want to again. However, any changes to the way they do LTRO’s will bring delays and while, on the face of it, an announcement would be euro positive, it’s likely to be short lived when we hear that “Program codename X” is going to take 3 years to actually start.
So for all the talk on LTRO’s and how they will be distributed the one thing that’s clear is that unless Mr Draghi has another OMT styled announcement rabbit already up his sleeve another LTRO is just going to be sucked into the banks vaults with little doing any good to the economy.
Do you put your money on Draghi or usual European ineptitude?
