Taking a page out of Ben Bernanke’s 2008 playbook, the European Central Bank unveiled a slew of obscure moves on Thursday aimed at preventing the credit markets from completely freezing up during the current sovereign debt crisis.
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The actions were made in addition to using the central bank’s traditional policy tool: lowering interest rates, marking the second-straight month. While the moves were initially cheered, ECB President Mario Draghi’s subsequent comments to reporters put pressure on global stocks.
Citing the current difficult conditions, the ECB announced four “non-standard” moves on Thursday: a new, supplemental three-year loan facility; lowering the quality of collateral it and other eurozone central banks will deem acceptable; slashing its reserve ratio in half; and temporarily discontinuing certain fine-tuning operations.
“These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market,” Draghi said in a statement. “They are expected to support the provision of credit to households and non-financial corporations.”
The emergency actions briefly boosted global stocks, but those gains were limited as Draghi continued to resist calls for increased bond buying by the ECB -- something many economists see as necessary to end the crisis.
Draghi also cast doubt about the legality of lending money to the International Monetary Fund, which could then theoretically use the cash to bail out troubled eurozone nations.
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Still, current tensions in the interbank markets may be eased by the measures unveiled by the ECB.
“The liquidity provisions were good. They were on the aggressive side,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “He’s addressing the credit crunch and the shortage of collateral.”
The ECB said it is adding a three-year loan facility to complement an existing facility that lasts 13 months. This program is expected to begin on December 21.
Secondly, the central bank said it will increase the amount of collateral banks can post by cutting the rating threshold for certain asset-backed securities to a second-best rating of at least “single A.” Further, national central banks will be permitted temporarily to accept as collateral bank loans that satisfy “specific eligibility criteria.”
Thirdly, the ECB is cutting its reserve ratio to 1% from 2% in an effort to “free up collateral and support money market activity.” This move will take effect as of the maintenance period starting on January 18.
Lastly, Draghi said the ECB will discontinue the fine-tuning operations that are typically carried out on the last day of each maintenance period “to support money market activity.”