Chart of the month
Mario Draghi only replaced Jean-Claude Trichet as president of the ECB on 1st November 2011, but has already made his mark, and in a way that must surely benefit the beleaguered Eurozone banking sector. In the four weeks to 2nd December the value of the ECB’s “main refinancing operations” (i.e., its short-term loans to the Eurozone’s banks) climbed from 182.8b. euros to 265.5b. euros - an increase of 45%. This is a significant reversal of the Trichet policy. In the early stages of the credit crisis, the ECB responded by offering cheap loan facilities. But in early 2010 banks were told that the loan facilities would be scaled back dramatically in order to choke off perceived inflationary threats. Banks then had to sell off assets in order to repay the ECB. They sold the assets that were most unattractive, but had some liquidity, notably Greek government bonds. By late April Greek government bond yields were soaring into wholly unsustainable territory. Under pressure from the politicians, the ECB had then to start (in May 2010) buying up Greek government bonds and, within a few months, these activities were extended to Irish and Portuguese government debt.
The drop in lending can be seen in the graph below. In mid-2009 the facilities were typically in the area of 600b. – 800b. euros, but by early 2011 they were down to about 400b. euros. Trichet and former ECB vice president Jürgen Stark were aggravating the already severe pressures on bank funding. Draghi, within a matter of weeks, has reversed this policy and, in effect, restored the non-standard measures. A huge question mark hangs over the long-term survival of the Eurozone. Nevertheless, if the ECB expands its loans to the banks by 250b. – 500b euros over the next six months to a year, it will provide the Eurozone’s banks with some breathing space.
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