ECB keeps crucial interest rates unchanged, mum on Greek debt

AFP

The European Central Bank held key interest rates at historic lows Thursday, but made no announcement regarding Greece despite speculation it may offer a helping hand to its cash-strapped banks.
Meeting in the Austrian capital instead of its usual home venue in Frankfurt, the ECB’s decision-making governing council voted not to alter borrowing costs, which have been at zero percent since March.
Analysts had not been expecting any further policy measures in this respect following a raft of different stimulus moves three months ago.
However, in the run-up to the meeting there had been talk that the ECB might allow Greek banks to participate in its regular refinancing operations, from which they had been barred for more than a year.
But the governing council made no announcement on the issue.
Normally, in the ECB’s refinancing operations, banks receive cash in the form of very low interest loans in return for ‘collateral’ —high-quality assets, preferably sovereign bonds, placed at the central bank as guarantee.
But given the desperate state of Greece’s finances, its sovereign bonds have been classified as “junk” for some years, and are not normally eligible to be used as collateral.
Initially, in May 2010, the ECB granted Greek banks a special waiver to get around this problem, allowing them to use Greek sovereign bonds as collateral, as long as Athens kept to the terms of its international bailout programme.
But when Alexis Tsipras and his radical Syriza party stormed to power in January 2015, threatening to rescind on the terms of its international bailout, the ECB suspended that waiver in February 2015 until the new government in Athens could thrash out a new deal with its creditors.
Since then, Greek banks have been kept afloat via the Emergency Liquidity Assistance or ELA programme, which is much more expensive for them.
Many ECB watchers had been speculating that the central bank could offer a helping hand after the recent deal Athens reached with its creditors.

Brighter economic
outlook?
All eyes are now focussed on what ECB president Mario Draghi will tell his traditional post-meeting news conference, especially with regard to the economic outlook for the single currency area.
The ECB was scheduled to publish its latest staff economic projections, with analysts expecting it to upgrade the inflation forecast for the first time in a long time.
While eurozone inflation remained in negative territory in May, with consumer prices falling by 0.1 percent, core inflation — which strips out the most volatile components such as energy, food, alcoholic beverages and tobacco — came in at 0.8 percent in May, up from 0.7 a month earlier. Berenberg Bank economist Holger Schmieding predicted a revision from 1.3 percent to 1.5 or possibly 1.6 percent for 2017, and from 1.6 percent to 1.7 percent for 2018. The ECB estimates that inflation rates of close to but just under 2.0 percent are conducive to healthy economic growth.

Call for patience
Draghi was also expected to call for patience, arguing that the latest raft of measures had yet to be fully implemented before their economic benefits could begin to make themselves felt.
At its meeting in March, the ECB cut interest rates to zero, expanded the asset purchase programme known as quantitative easing (QE) and announced a new scheme of ultra-cheap loans for banks.
Nevertheless, Draghi was likely to keep the door open for further stimulus measures in future and
reiterate that the ECB is ready
to use all means at its
disposal, said Natixis economist
Johannes Gareis.

European banks feel the pinch 

Bloomberg

If interest rates stay where they are, the combined lending revenue at Germany’s five publicly traded banks will fall by 2.1 billion euros in 2018, or about 9 percent, from last year, estimated Jochen Schmitt, an analyst at Bankhaus Metzler in Frankfurt.
“Negative rates are hurting banks,” said Mark Haefele, global chief investment officer of UBS Wealth Management, in an
interview in London.
“A lot of investors are unsure about how much pressure banks are going to remain under on the earnings front as a result of that.”
As old loans mature or are refinanced, euro-zone banks will be left with an increasing stock of newer loans made at lower interest rates. Those may prove less profitable if the bank’s funding costs don’t decline as well.
“We’re going to start seeing profitability come under more and more pressure as the better-earning assets melt away,” said Michael Huenseler, who helps manage 17 billion euros, including bank bonds, at Assenagon Asset Management in Munich.
ECB Vice President Vitor Constancio, speaking to Bloomberg Television, said that while negative rates over time may hurt bank profitability, the net effect of the central bank’s stimulus programs has benefited lenders by boosting the price of assets, reducing bad loans and sparking an economic recovery.
The ECB, led by President Mario Draghi, expanded its monthly bond-buying program by a third in March and launched a new series of long-term loans to banks to stimulate the economy. Rates on those loans can be as low as the interest rate on the deposit facility, indicating the ECB may pay lenders to borrow under certain conditions. Banks increased lending to non-financial companies and households almost every month in the last year, after an almost three-year contraction.
While the central bank may brush off bankers’ complaints, it can’t ignore investors’ concerns that lenders are becoming riskier, said Huenseler.
Since the ECB first cut the deposit rate below zero in June 2014, the cost of insuring European financial firms against default has doubled, based on the Markit iTraxx Europe Subordinated Financial Index of 30 companies.
Yet even some bankers see little alternative to the ECB’s drastic measures.
“It’s necessary for the economic environment in which we move, even though it’s not good for us,” Jose Antonio Alvarez, CEO of Spain’s Banco Santander SA, told reporters in April. “Any retail bank, including us, would like to have higher interest rates. That clearly helps the business, the margins, the capacity to generate results.”