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ECB FACES UP TO THE COLD REALITY OF A SIGNIFICANT POLICY FAILURE

Tom Elliott

The European Central Bank (ECB) is “finally facing up to the cold reality of Europe’s weak banks”, according to one of the world’s largest independent financial advisory organisations.

The observations from deVere Group, which has $10bn under advice and 80,000 clients, come after Mario Draghi, the ECB president, announced a raft of measures to combat low inflation and boost the Eurozone’s economy.

To prevent the risk of deflation and reduce the strength of the euro, the ECB has cut its main refinancing interest rate to 0.15 per cent from 0.25 per cent.  In addition, and for the first time, banks will be charged 0.10 per cent to keep funds at Europe’s central bank overnight.

Tom Elliott

Tom Elliott

Tom Elliott, deVere Group’s International Investment Strategist, comments:  “This addresses head-on a key problem in the region’s economy, which is banks’ preference to hoard cash in order to help repair their balance sheets.

“The bold action launched on Thursday means that the region’s banks will now have to pay the ECB to hold their cash.  It is intended to force banks to lend out their cash instead, so boosting economic recovery.”

He continues: “There was no Eurozone version of the TARP in the US, that allowed banks to write-off bad loans and start afresh after the credit crunch. Instead the bad loans became nationalised, through state bailouts of banks, or left to fester on banks’ balance sheets, creating a region of weak banks.  It is this policy failure that is at the heart of weak growth and rightful anxieties over the threat of deflation.

“These measures confirm that the ECB is finally facing up to the cold reality of Europe’s weak banks.”

Mr Elliott concludes: “European stock markets have rallied, the euro has weakened and the markets appear satisfied – for now – that the ECB will act to prevent further falls in consumer prices.”

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