Expanding Stimulus by European Central Bank Expected

european sovereign debt

Banks have been handed the equivalent of $162 billion in US dollars by the European Central Bank (ECB) in cheap, long-term loans. This action is just one part of ECB’s attempts to stimulate a struggling economy in the Eurozone.

However, according to many analysts, the amount of money is too small and because of this, there is a strong chance that the ECB will take more serious steps soon to include purchases of large-scale bonds.

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Markets were closely watching the dollar amount of the loan offerings due to Mario Draghi, president of the ECB stating that approximately 1 trillion euroes will be added in a new stimulus sometime within the next few months.

For four years, banks took money at just 0.15%, and extremely low interest rate. The ECB is hopeful that money will be lent by the banks to companies, which in turn would create the opportunity for expansion. This would also boost jobs and restart the economy.

However, analysts also said the dollar amount wanted by banks was not enough to achieve that goal. In fact, they believe that the ECB will need to turn to other stimulus programs in order to hit 1 trillion such as using newly created money for purchasing government bonds on a large scale.

The Federal Reserve made purchases of large scale bonds, which was possible because of the recovery being boosted and unemployment rates dropping. Officials with the ECB along with some economists question if the same action would be effective in the Eurozone. Additional measures have been promised by Draghi if improvement in the economy is not seen. However, certain members of the governing council with the ECB are being resistant.

Christian Schulz with Berenberg Bank wrote to investors saying that additionally tools will need to be used by the ECB in order to reach the targeted size of the balance sheet. Benoit Coeure, a top ECB official also stated that credit offers, which include September’s round of loans in the amount of 82.6 billion euro create conditions that bolster credit growth to a real economy.

Of 18 countries, economies that depend on the euro saw growth of just 0.2% during the third quarter compared to the prior period of three months. Still extremely weak at 0.3% is inflation while unemployment reached a high of 11.5%.

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David Goldstein

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