Today for the first time in history an important central bank introduces a negative deposit facility interest rate. What are the implications? There are no direct consequences for deposit owners: don’t worry you do not have to pay the interests on your deposits to the bank. What really change is that now banks have less incentives to leave their money in ECB. They have two alternatives: either keeping it in cash (which is costly because you need also to protect it), or lending it. And this is the goal of Mario Draghi. The European Central Bank expects that unlikely banks will keep all this amount of money in cash. This move together with the cut of the benchmark rate to 0.15 percent from the 0.25 percent has a twofold aim: act as an economic stimulus and fight the risk of deflation.

To support the first target, ECB planned also two TLtro’s (Targeted Long Term Refinancing Operation) to stimulate lending. These two are different from the previous Ltro’s because banks can lend the money only to firms and households (but they can not finance mortgage loans, people from Frankfurt wants to avoid a real estate bubble). Through lending stimulation, the goal is also to stimulate economic recovery which in Europe is late on arrival. Then, to contribute also to a return of inflation rates to levels close to 2 percent, it was announced also the stop of the SMP sterilization. In fact until today ECB was offering banks interest-bearing deposits equal to the amount of government bonds that it has in the balance sheet. This was done in order to counter balance the money injection caused by the SMP program, where the central bank bought a huge quantity of government bonds to rescue the European countries in troubles.

Furthermore, all these interventions have also an impact on the exchange rate. They are supposed to lower it, which will boost European export, but it is still too early to quantify their impact.

Also a sort of Quantitative Easing was expected, an ABS (Asset-backed security) purchase, but it did not arrive today. Mario Draghi announced that they are starting the preliminary works, arguing also a possible modification of the Lisbon Treaty as a cause of delay. To refresh our memory, let us recall what ABS purchase implies, and why it is differnt from the QE of FED. The latter is an unconvenitional monetary policy which consints in buying financial assets (bonds, equities, etc.) in order to increase the money stock and to lower the interest rates. This serves as an economic stimulus in periods of recession. Obviously a central bank during a QE can buy also a certain amount of ABSs. And here we have the difference, it seems that ECB will act only on these financial assets. But why? The answer is that these assets are relatively safer compared to the classic equities, given that their payment are backed by a specific group of assets. We used the term relatively safer because the recent financial crises showed the problems of this form of investment. The trick is to find securities well collateralized by a pool of assets which really diversify the risk. This intervention could also act as another lending stimulation.

Another question could be why ECB did not follow the FED way. The answer is that even if European treaties would not be a problem, a QE in Europe could be a cause of political problems. In fact if US is a unique federal republic, European Union is still composed by individualistic countries. In this framework how ECB could justify the purchase of German assets instead of Spanish ones for example? Recent elections show that in some countries anti-european movements won two many million votes. Probably at Frankfurt they are concerned about this, and they do not want to offer new reasons to sustain these movements. It is not possible to reach a full economic recovery without political stability.