How to invest if the ECB cuts rates below 0%
The excess liquidity in the euro-zone financial system has recently fallen to €100 billion from a peak of €800 billion before the banks started to repay the money borrowed from the ECB in the long-term refinancing operations. That effectively means that the maximum benefit of a negative interest rate would only be €100 billion, not nearly enough to really boost bank lending and growth and bring down inflation.
But by adding lots of extra funds to the financial system, the euro-zone banks would have a stronger incentive to increase lending to corporations and households, rather than paying the ECB to deposit the extra cash. Economists predict that part of this stimulus package will be introducing another round of LTROs, ceasing to drain money from the SMP and launch a kind of asset-backed securities package. And the math is quite simple:
“A new LTRO should be good for banks and their equity prices, as an ability to borrow at the Refi rate, 0.10% say, for 3 or 4 years will be very good for profits, with loans to corporations yielding 4% plus, say,” Beecroft said. “Why would a bank borrow throgh an LTRO for 3 years at 0.1%, say, only to put the money on deposit at [i.e.] -0.15% at the ECB?”