The World from Berlin: ECB Rate Cut 'Does No Harm But Achieves Nothing'
The European Central Bank's decision to cut its interest rate to a historic low on Thursday has done little to improve investor confidence in ailing euro-zone countries. In fact, many German editorialists think the move is nothing more than symbolic.
Traders stand in front of electronic boards at the stock exchange in Madrid. Yields on Spanish bonds rose on Friday despite recent efforts by euro-zone leaders and the ECB.
Worries about the global economy are noticeably growing, and efforts by the euro zone and its central bank to stabilize Europe's common currency are apparently doing little to calm them.
On Thursday, in an attempt to revive the euro zone's flagging economy, the European Central Bank (ECB) cut its key interest rate to a historic low of 0.75 percent and lowered its overnight deposit rate, the interest it pays banks to park money with it overnight, from 0.25 to zero percent in the hopes that reluctant banks will be encouraged to invest their money in the real economy or lend it to each other instead. The move, of course, also encourages private individuals not to park their money in banks since yields are likely to become even further outpaced by inflation.
Thursday saw similar moves by central banks in England and China. The latter lowered its rate by 0.31 percent, to 6 percent, and the Bank of England announced it would pump an additional 50 billion pounds (63 billion) into its ailing economy.
The ECB's move comes as Italy and Spain, in particular, are finding it increasingly difficult to refinance their debt. Last week, euro-zone leaders at a summit in Brussels agreed to allow the European Stability Mechanism (ESM) bailout fund to lend money directly to Spanish banks as a way to keep its government's debt load from rising as well as to actively purchase sovereign bonds on the secondary market to help ease yields.
Though widely anticipated, the ECB's rate cut was not expected to take pressure off these high borrowing costs -- and it didn't. In midday trading on Friday, yields on 10-year Spanish government bonds rose to 6.9 percent, close to the 7 percent level considered unsustainable in the longterm, raising fears that the country might be forced to ask for bailout aid from the ESM. What's more, yields on Italian bonds climbed to just above 6 percent, and the euro sank to an almost 5-week low against the dollar.
In Friday's newspapers, most German commentators seem to agree that the move has symbolic or psychological value -- but little more.
Financial daily Handelsblatt writes:
"It isn't the European Central Bank's last word, but (raising the interest rate) is an act of powerlessness. With the historic rate reduction to 0.75 percent, the ECB can make only cosmetic corrections to the dreary appearance of the global economy. As long as the future of the euro is uncertain, no central bank will be able to dispel the distrust crippling the global economy."
"The real fight against recession is not to be fought with interest rates. What's decisive for the further economic development is finding a political way out of the European sovereign debt crisis. In the absence of such an exit, companies, consumers and investors cannot build up new trust. The ECB has an important role to play, but not the key role. It will continue to stabilize the financial system and, in an emergency, step in to prevent collapse. With its program to buy up state bonds and its increasingly risky refinancing of struggling banks, it has already overreached its own mandate. But it can go no further, nor should it. Only policymakers can ensure that (the ECB's rate cut) falls on fertile soil. Only when faith in the euro returns will the economy grow again."
The center-left Süddeutsche Zeitung writes:
"It's obvious that a rate cut from close to zero to even closer to zero will have no significant effect on the economy. Psychologically, too, its impact is likely to be limited. What is actually needed is for people in the debt-laden countries, where economic output has collapsed, to start spending money. But it is precisely in those countries that confidence in the future is so low that the interest rate cut is likely to have no effect."
"Hence, the rate cut can ultimately only be explained within the context of the crisis as a whole, as an additional step to prop up the shaky banks. Everything that the ECB is currently doing is intended to calm the markets. If it had failed to carry out the widely expected rate cut, it would have caused the markets to panic again. Ultimately, the ECB's decision is a sign of impotence -- it does no harm, but also achieves nothing."
The conservative Die Welt writes:
"Low rates currently have little effect. Households and companies can already get loans at historically low prices -- but that hasn't stopped the recession in the crisis countries."
"Under these circumstances, low rates don't make any difference anymore. And even having zero interest on deposits at the ECB would do little to get the banks to lend money to other (financial) institutes or companies rather than hoarding it."
"For this reason, already the current rate reduction is dubious. Its main effect is as an additional subsidy for banks in Southern Europe: Now they can borrow money from the central bank for less and then invest it in the government bonds of their own countries, which still have high yields. Apart from that, the rate decision has at best a psychological effect. But, to achieve this effect, the ECB is using up ammunition that it might still need if the situation worsens. What are actually economic problems in Greece and Spain can hardly be combated with traditional monetary policies."
The Financial Times Deutschland writes:
"The fact that the interest rate cut turned out to be so small -- and thus disappointed some people -- is nevertheless reasonable. In this situation, it has symbolic value at best. A lowering of the interest rate by 50 basis points would have made a comparably minor difference. But it also gives the ECB the possibility of undertaking another small interest rate cut before this tool finally loses its effect. Once it gets to zero, it's over. The only instruments available then would be controversial measures, such as lowering the quality of the collateral banks provide to the ECB in exchange for money, or even making a new cash injection, a third tender."
"In addition, it is mainly confidence -- and not money -- that the markets are lacking. Banks and investors are currently shying away from investing in companies in countries like Spain, Greece and Italy. Instead, they prefer to hold on to their assets until the economic situation there stabilizes. Right now, it seems safer for them to deposit their money at mini-interest rates, despite inflation, than to bet on a stabilization or even an upswing in the euro zone. It's precisely for that reason that the ECB also sank the rate on overnight deposits to zero. The ECB wants it to no longer be worthwhile for money to be parked there."
The center-right Frankfurter Allgemeine Zeitung writes:
"In light of the dismal situation in some euro-zone countries, the sinking of the interest rate to the lowest level ever seen may be justifiable. But the economic data and an already-improving mood on the markets argued more for holding off on the change. Those who have resigned to the fact that the (ECB) has become a political actor in the race to save the euro will see the premature lowering of the interest rate as the lesser of the possible evils. Likewise, that may also be why Germany's central bank, the Bundesbank, refrained from making critical comments about the move this time around. It also might be because the banks were trying to get their cake and eat it too. They had hoped, in particular, for an additional loosening of rules for the securities (after the ECB took a first step two weeks ago) they are required to provide the bank as collateral for loans."
"The fact that the ECB Governing Council didn't even address this issue officially can be viewed as a success for the Bundesbank. But it won't last long because the ECB will still have plenty of opportunities ahead to be more generous in issuing carrots (rather than sticks) to the banks."
-- SPIEGEL ONLINE Staff
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