March 7, 2019 / 4:02 PM / 13 days ago

Breakingviews - With friends like Draghi, banks don’t need enemies

European Central Bank (ECB) President Mario Draghi holds a news conference at the ECB headquarters in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

LONDON (Reuters Breakingviews) - European Central Bank President Mario Draghi is trying his best to be a buddy to banks. His motive: to revive slowing euro zone growth and low inflation by ensuring there are no barriers to consumers and businesses obtaining credit. But with friends like these, lenders hardly need enemies.

Draghi said on Thursday he was going to offer banks new long-term loans even before earlier ones start maturing, albeit on slightly less generous terms. That was a surprise to most economists and traders. While they broadly expected such an announcement, most were anticipating it would come in a month or two’s time.

What was supposed to be a nice surprise quickly soured. The EURO STOXX Banks Index fell nearly 4 percent, on track for its worst day so far this year, with Italian banks – who took up roughly a third of the previous long-term loans – hard hit.

One reason was that Draghi also said policy rates, which are at record lows, would stay that way for longer than previously suggested. The other was that ECB staff slashed their 2019 growth forecast to 1.1 percent from the 1.7 percent rate they had been expecting as recently as December.

Ultra-low interest rates, like the ECB’s minus 0.4 percent deposit rate, are a disaster for banks. Little wonder then that investors were so downbeat on hearing that lenders would be saddled with them until at least the end of this year. Furthermore, if growth is as weak as Draghi now forecasts, more of the loans that banks make risk going bad. Nor will consumers and companies batter down the doors to get credit if economic activity is subdued.

ECB policymakers, who unanimously backed the package of measures, have some excuses. Changing their interest rate guidance gives certainty to economic actors and shows the central bank is proactive rather than waiting for the economic climate to worsen before doing something. And they needed justification for acting more quickly than expected, which downgraded growth forecasts gave them. That is little consolation for banks, which find themselves under friendly fire again.

Breakingviews

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