When ECB Rates Bite, It's the Periphery That Feels the Pain

Did the ECB's Mario Draghi Deliver?

Mario Draghi said it himself: some banks in the euro area suffer more from negative interest rates than others.

After the European Central Bank cut its deposit rate further below zero — and opted against a tiered system to ease the burden — the institution’s president highlighted the issue of tracker loans indexed to interbank borrowing costs such as Euribor.

For banks that have issued these variable-rate loans “as negative rates bring down into negative territory the Euribor, you see that their mortgages go to produce a loss,” he said. “Unless the spreads are sufficiently high, which is not always the case.”

The exposed banks are typically in the euro area’s periphery, where the legacy of soured debt from the financial crisis is heaviest. According to Morgan Stanley, variable-rate loans account for 98 percent of outstanding mortgages in Spain, 95 percent in Portugal and 55 percent in Italy. That compares with 15 percent in Germany and zero in France.


The Governing Council had previously acknowledged the problem, with ECB Vice President Vitor Constancio saying the central bank was considering ways to “mitigate” the impact of its deposit rate, which was cut to minus 0.4 percent on Thursday.

A tiered system offering exemptions or lower rates on the overnight charge for some excess liquidity — similar to systems used by the central banks of Switzerland and Japan — was rejected in part because of what Draghi called the “multi-faceted” nature of the euro-area banking system. In essence, it would have benefited the large core-country banks more than those in the periphery.

Instead, the ECB plumped for another program of long-term financing for banks linked to their lending to the real economy. Unlike a current program still under way, this one could actually pay financial institutions to take central-bank cash.

“This at least incentivizes the banks to lend more to the real economy thanks to the ‘carrot’ of the possibility to access the additional funds at the negative deposit rate, even with a moderate growth of the lending portfolio,” said Fabio Balboni, an economist at HSBC Holdings Plc in London. “One of the biggest problems in terms of bank profitability is the fact that banks in the periphery tend to lend mostly on a variable basis.”

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