/ world today news/ As expected for at least 15-20 days, today the European Central Bank further reduced its main interest rate by 25 basis points to 0.50%. The Bank will continue to lend banks as much money as they need until at least mid-2014, confirming my analysis today of the dire economic and financial situation in Europe.
However, more importantly, ECB Governor Mario Draghi announced that the bank is “ready to deal, including with the consequences of negative interest rates on deposits”.
Until now, despite the relatively low interest rate on deposits, banks in the Eurozone were still able to arbitrage (calculate) the difference between the interest rates they received from the ECB and the money market fund rates in which they could invest.
With the further reduction of the main interest rate on deposits, the ECB effectively eliminated the possibilities for such arbitrage.
A number of banks and financial institutions will be further exposed to collapse. Market liquidity will fall further.
With this decision, the ECB is effectively punishing savers in Europe again. Such a policy, although known and perhaps somewhat successful in history, gives very contradictory results.
During World War II, most countries with high national debt deliberately and artificially capped their interest rates below the level of inflation. They forced savers to accept negative interest rates, which in practice reduced the price and resp. volumes of government debt, but it has created enormous difficulties for savers in terms of coping with the rising cost of living values. For example, such a policy allowed the US economy to reduce its debt-to-GDP ratio accumulated since the Great Depression from 250% to almost 128%, but at the expense of severe market distortions.
This “new” ECB policy is actually a hidden form of taxation that will essentially further reduce the purchasing power of investors and savers, as the manipulated and artificial levels of interest rates will be clearly below the level of inflation. What will be a gain for governments (from reducing their liabilities) will be a loss for savers. Without any doubt.
For Bulgaria, for the Bulgarian banking system and for Bulgarian savers and depositors, at first glance, this decision of the ECB will not affect. But, due to the fact that more than 4/5 of the banks in the country are foreign and from Eurozone member countries, it will undoubtedly affect their credit and deposit policy, as well as their previous policy of holding larger reserves.
In any case, against the background of the lack of dynamics of economic activity in our country, of active investment and new projects, the banks will further reduce the interest rates on deposits. And this, no doubt, will be reflected in the same way described above.
Moreover, for those who understand the meaning of the economic and financial categories, this will mean a new, hidden transfer of wealth from the savers to the state, a new, perhaps not a small, “haircut” of the purchasing power of the depositors – companies and households.
All this, taken together with my analysis of the economic situation in Bulgaria today, shows that the country’s new government will have to deal with a much more complex international and domestic financial situation, which will require radically new solutions in order to exit Bulgaria since the crisis.
/See also the first part of the analysis/
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