The city where the latest European Central Bank (ECB) meeting was held, Naples, could have been centre stage for its President Mario Draghi to introduce the much-anticipated and miraculous Quantitative Easing (QE), which has yeilded good results for the US economy. Despite playing on home turf, however, the Italian banker chose to keep that ace (the purchase of public debt similar to those purchased by the US Federal Reserve) up his sleeve, and to stick to the path set by asset-backed securities (ABS). This means buying private debt, as early as this month, to revive an ailing eurozone that registers a stagnant five-year low inflation rate.
Protests against the ECB
Draghi’s lack of ambition disappointed not only markets but also the European periphery and, in particular, his compatriots. Thousands of anti-austerity protesters took to the streets of Naples to demand more economic stimulus, and less cuts. This while the ECB’s Governing Council was meeting at the Capodimonte Palace, a former residence of the Bourbons, who once ruled southern Italy’s largest town with force; a city that lives today under the yoke of the Camorra, with an unemployment rate of 25% and the highest poverty index among major Italian cities.
“We understand the reasons that lie behind these protests,” Draghi declared at a press conference after the meeting. “What I think needs to be corrected is the perception that the ECB is at the centre of, and is to be blamed for, the situation.” A situation that is a reflection of the recession of the Italian economy, and the stagnation in the rest of the region, according to the euro’s guardian.
Draghi also retracted the opportunity to increase the ECB’s balance by as much as 1 trillion euros after the banking sector showed a weak appetite in the recent liquidity auction at ultra-low interest rates of the so-called TLTRO (targeted longer-term refinancing operations), a program intended to reactivate credit for small- and medium-size enterprises and households.
This was, in principle, the “potential scenario” that the ECB had set itself by adding together the purchases of asset-backed securities and covered bonds. “Simple and transparent” assets, adjectives that cannot be applied to Draghi himself, as he chose not to reveal what the program’s budget allocation for the next two years would be.
So what will these assets be, and where will they come from? Well, from the private debt of economies under EU supervision with junk-bond ratings such as Greece and Cyprus. The problem here is that the ECB will have to compensate for such high risk by buying the assets of banks and companies in safer countries like Germany, leaving intermediate countries –Italy, Spain and even France– out of the game. On the other hand, Greece would be doomed to ask for a third EU bailout when the current one expires at end of this year if it wants to continue to benefit from Frankfurt’s assistance. Will Athens find it reasonable to continue to subject itself to the decisions of the Troika, in order to have access to the ECB’s funds? We will see…
With close-to-zero interest rates, Draghi has little room to fulfil his promise that he will do “whatever it takes to preserve the euro”, and has instead chosen to proceed very cautiously. He does not want to take the wrong step; he wishes to gather support so as to preserve the ECB’s independence, and to contain criticism from Germany, which fears that the ECB will become a “bad bank” if it buys toxic assets, ultimately at the expense of taxpayers.
Berlin has also warned that the ECB monetary policy discourages the more indebted countries to carry out structural reforms, and to meet their deficit commitments. Draghi is looking to gain some time before implementing more non-conventional measures. The QE’s door remains open, but it will take a miracle to happen: unanimous approval by the ECB’s Governing Council. In the meantime, much as in the past, Neapolitans continue to look to San Gennaro for divine help, hoping that the blood liquefaction ritual of their saint will bring better times.