UPDATE: ECB needs a better plan to boost Europe's economy
By Satyajit Das
SYDNEY (MarketWatch) -- Reviewing the borrowing costs of European nations, a visitor may conclude that Europe's economic crisis is over and its rehabilitation is complete.
Ten-year government bond rates for Spain, Portugal and Ireland are on a par with the U.S., the U.K., Canada, and Australia. And a little over a year after requiring a bailout, Cyprus in June issued a five-year bond yielding 4.85%, which was substantially oversubscribed.
But European government bond rates do not reflect fundamental factors, only the effect of massive liquidity injections from the European Central Bank. Europe's recovery from the recession is weak, and the risk of a relapse is ever-present. Growth, employment and investment are moribund. Disinflation or deflation risks are increasing, threatening to make a difficult debt problem unmanageable. The inadequacy of policy instruments is increasingly evident.
Responding to external pressure and its own oft repeated willingness to act, the ECB in early June announced a series of measures designed to counter identified problems.
The centerpiece was a new, complex funding-for-lending scheme -- the Targeted Longer Term Refinancing Operation ("TLTRO"). The ECB will finance up to 7% of bank loans to non-financial corporations. TLTRO loans, which will mature in September 2018, will be at fixed rates, currently equivalent to 0.25%. Between March 2015 and June 2016, banks will be able to borrow additional amounts in TLTROs, via auctions conducted quarterly.
In addition, the ECB proposed purchases of asset-backed securities to increase funding for businesses, with details still to be worked out.
The initiatives are designed to counter "lowflation," increase supply of credit to create growth and weaken the euro to increase European exporters' competitiveness and counter disinflationary pressures from a strong currency.