What Should Bankers Do With Piles of Cash?
So you're a European bank with some loans on your balance sheet that you made to companies not too long ago. The loans are of good quality, paying interest at the rates that prevailed in recent years. The European Central Bank would like you to bundle those loans into a shiny new asset-backed bond, which it will purchase from you (provided it isn't a sausage stuffed with derivatives, in ECB President Mario Draghi's evocative term). In return, you will have a pocket full of fresh cash.
What exactly you will do with that cash, though, is problematic at best. The ECB wants you to find new borrowers eager for money to invest in their businesses, so they will start hiring from Europe's army of unemployed young adults. It's probable, though, that your new loans will either be riskier than the ones you offloaded to the ECB, or at much lower interest rates, or (more likely) both, with corporate borrowing costs at record lows:
There's a related problem with these targeted longer-term refinancing operations, or TLTROs, that the central bank is introducing this month. At the start of August, Draghi floated the hope that commercial banks might borrow as much as 850 billion euros ($1.1 trillion) from the program; analysts at Bank of America Merrill Lynch reckon the drawdown could add a net 450 billion euros of monetary stimulus.
But where can you hoard that cash while you're searching for opportunities to put it to work in the real economy? Putting it into short-dated European government bonds, the usual investment of choice for a risk-averse bank treasurer, puts you in a world of pain all across Europe. Real two-year yields in Germany, Belgium, Finland, the Netherlands, Denmark, France and Austria are all negative. EvenIreland, which was paying a staggering 23 percent for two-year money as recently as mid-2011, charges you for the privilege of lending to it as of today:
I can't help thinking that the ECB is like a video-game player that's been hoarding ammunition for the trickier later rounds, only to run out of lives instead. And it seems fair to point the finger at the Bundesbank; if the guardians of German monetary affairs hadn't been so obstructive, Draghi might have put quantitative easing in place years ago, and the euro region economy might be reviving by now, instead of heading back into a recession.
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