The European Central Bank (ECB) lends large amounts of money to banks to lend to companies with difficulties due to the stoppage of their activity in the pandemic, but its former president, Mario Draghi, has already warned that it is also necessary a fiscal expansion and state guarantees.
“Unlike the 2008 financial crisis, this time the banks are not the source of the problem. But we need to ensure that they can be part of the solution,” said the president of the ECB’s Supervisory Board, Italian Andrea Enria recently.
“We know that households and businesses, both large and small, in the euro area face an extremely difficult economic and financial situation,” added Enria.
The US Federal Reserve (Fed) and the ECB have applied huge monetary stimuli to support businesses and households and save jobs.
The Fed has also guaranteed other central banks liquidity in dollars through “swap” lines, which are agreements between two central banks for the exchange of currencies, to cover the demand for dollars due to the enormous amount of debt in this currency around the world. .
Banks must lend to save jobs
As it did in the financial crisis, the ECB once again offers banks unlimited amounts of liquidity at very favorable conditions, sometimes at negative interest rates, that is, it gives them money, even if they don’t need it, to lend businesses and homes.
The ECB lends to banks weekly at 0% and in the long term can lend up to -0.75% if they give enough credits to the real economy.
Since October 2008, in the face of the serious financial crisis after the bankruptcy of Lehman Brothers because the banks did not lend to each other and therefore did not redistribute liquidity, the ECB lends them everything they want as long as they provide sufficient guarantees.
The ECB also creates money by buying debt issued by euro area governments and also buys bank and corporate bonds.
Now, in the face of a resurgence of distrust of the pandemic and liquidity problems, the ECB has also relaxed the criteria for admitting collateral, offers more refinancing auctions and will acquire debt worth 1.1 trillion euros this year.
The United States Federal Reserve (Fed) has gone further, leaving interest rates between 0 and 0.25% and buying unlimited Treasuries and mortgage-backed securities.
To these measures, he has added several rounds of successive injections of liquidity to the markets, including the opening of a “discount window” to offer short-term loans to US banks in the face of financial tensions.
At the same time, the US Treasury gave the green light to the US central bank for the opening of a $ 10 billion credit instrument to support short-term corporate debt markets.
In an article in the “Financial Times”, Draghi stressed that companies need state guarantees in order to receive credits.
Banks can create money by allowing overdrafts and credit facilities and must quickly lend at cost 0 to companies prepared to save jobs, the former ECB president said.
“Because banks thus become a vehicle for public policy, the capital they need to carry out this task must be provided by the government in the form of state guarantees to all overdrafts and additional credits,” according to Draghi.
If the money or liquidity available in the banking system exceeds the needs of the banks, then there is an excess of liquidity, a money that is never printed on banknotes and that is distributed very unequally when there is mistrust and banks do not. they lend to each other.
Before the pandemic crisis, banks barely asked for new liquidity, but now they do it again, due to the fear of not recovering the money borrowed in the short term, as after the bankruptcy of Lehman Brothers, the analyst at EFE said. Commerzbank Michael Schubert.
The excess liquidity is unevenly distributed and “in Germany there is a very high excess liquidity, although in the countries of the South it is not so high, this is so in normal times and intensifies in crises,” adds Schubert.
Overnight excess liquidity in the euro system was about 1.7 trillion euros in the second half of last year, according to Schubert.
Now it has risen, but there are no concrete figures yet, and it is mainly in German banks, as after the bankruptcy of Lehman Brothers, and to a lesser extent, in the French, Dutch, Luxembourgish and Finnish, says Schubert.
The ECB has not discussed “helicopter money,” giving money directly to citizens, something it is prohibited from doing, like the Fed, because it is considered state funding.
The Fed cannot lend directly to companies or households, but under exceptional circumstances such as the current one, it can create special instruments that offer backup loans.
The term was coined by economist Milton Friedman, the 1976 Nobel laureate in economics, who used the metaphor of throwing money from a helicopter for citizens to collect, spend, and drive demand.
It refers to the possibility for central banks to give cash directly and, by extension, the term is also used more broadly to refer to a very expansive fiscal policy.
It has recently been mentioned again long after the Trump Administration decided to give citizens in the US, where there is no basic social security system, consumer checks.