The European Central Bank’s decision to offer eurozone financial institutions cheap four-year loans offers fresh hope to struggling banks in Southern Europe–and has drawn immediate ire from their Northern European rivals.
The loans allow eurozone banks to borrow at no cost for up to four years. Many banks in Italy, Spain and the region have struggled to clean up bad loans and maintain investor confidence.
But in Germany, where banks sit on more cash than they can productively deploy, the industry lashed out at the loan program and other aspects of the ECB’s monetary-policy decision. German financiers said the moves were unnecessary and could undermine German investments, insurance and retirement plans.
ECB President Mario Draghi addressed such concerns by saying Thursday that it was unlikely interest rates would fall further.
Investors, foreseeing immediate help for all eurozone banks, bid up lenders’ shares Friday. Spain’s Banco Popular Español SA surged almost 13%, Italy’s UniCredit SpA leapt 9.5% and Germany’s Deutsche Bank AG, which faces internal restructuring problems, jumped 7.4%.
For bankers, though, the dispute highlights afresh the lingering gap between lenders in the continent’s generally healthy north and a south that struggles with debt and high unemployment. This represents one of many conundrums in creating a one-size-fits-all monetary policy for the 19-country eurozone.
The ECB on Thursday rolled out a six-pronged plan to boost weak inflation to its target of just below 2% and increase bank lending in the eurozone. The ECB also said it would cut all of its key interest rates, pushing its core deposit rate further into negative territory. The move means commercial banks with excess funds–which are mainly those in the north–must pay even more to park cash at the central bank.
The ECB also announced a fresh program of targeted, longer-term loans to banks, which can now even be paid to lend to the eurozone’s private sector. The ECB added corporate bonds to the mix of assets it can buy as part of its large-scale asset-purchase program, a policy known as quantitative easing. The ECB also increased its monthly bond purchases by EUR20 billion ($22.30 billion), to EUR80 billion.
A German trade group representing commercial banks including Deutsche Bank and Commerzbank AG criticized the ECB’s moves to pump more money into the economy. The association, BdB, accused the central bank of overstating “deflationary risks.”
Germany’s association of savings banks also opened fire, saying the ECB measures hurt not only savers and banks but endowments, pensions, social-security schemes and insurers.
“These measures are above all aimed at financial institutions in crisis in Southern Europe, which could use favorable refinancing,” said Michael Wolgast, the chief economist at the savings-bank association, DSGV. The longer-term loans “aren’t necessary for monetary policy and they will not have an effect on the real economy,” he said.
Bankers aren’t the only Germans upset. The front page of business daily Handelsblatt’s Friday edition depicted Mr. Draghi lighting a cigar with a burning EUR100 bill. “Mario Draghi’s dangerous game with the money of German savers,” read the caption, and “Whatever it takes” beneath, a sarcastic allusion to Mr. Draghi’s statement in London nearly four years ago promising to do “whatever it takes” to save the euro.
Experts say the ECB’s package of measures was a victory for banks in the eurozone’s embattled south, which can access cheap funding for loans.
“Italian banks are much more old-fashioned commercial banks that make money from loans,” said Luca Paolini, chief strategist at Pictet Asset Management. “The ECB decision…is a positive because [the targeted loans] are on very generous terms and will go a long way to offset any negative impact of falling deposit rates.”
Southern European banks are more dependent on central-bank funding and are less rich in deposits than their German peers. Data compiled by Dutch lender Rabobank Group show that as of January the top borrowers from regular ECB loans were banks from Italy and Spain. German banks, in contrast, had the highest level of central-bank deposits.
The ECB itself doesn’t disclose this information. Ample deposits mean that German banks are well-insulated from any capital flight.
Data provided by the ECB show that the cost of borrowing for German firms stood at 1.98% in January, down 22% from their level in June 2014, when the ECB first pushed borrowing rates into negative territory. Comparable rates in Italy in January stood at 2.47%, down 32% from June 2014
The ECB’s decision Thursday is “going to hurt banks that have a lot of excess liquidity” said ING economist Carsten Brzeski, citing German savings banks. “These are the ones being hurt by the negative deposit rate.” He said these banks need to park excess funds somewhere, “so they park it at the ECB.”
These lenders also aren’t helped by the ECB’s targeted four-year loans, he said. “Why would you now pick up more excess liquidity if you already are having trouble getting rid of your excess liquidity?”