The ECB’s gloomy message: Propping up the periphery

THE European Central Bank’s measures on June 5th have been reverberating through the markets as traders and investors have sought to digest the overall message. Though the ECB became the first big central bank to adopt negative interest rates, even that historic step may turn out to be less important than its signal that it will be propping up the troubled periphery of the euro area for years to come. New research published this week, from the International Monetary Fund and from Standard & Poor’s underlines why that will be the case.The ECB’s message was delivered through its commitment to lend to banks as much as €400 billion ($540 billion) later this year at a fixed rate of just 0.25% for loans stretching until September 2018. That is easy money by any reckoning, especially since the main condition is that banks must repay the funds in two years’ time if they have failed to improve their record in lending to private firms and households (excluding mortgage debt). Such improvement could take the form of a slower contraction in their lending from its current decline as well as a higher increase if they are presently expanding their provision of credit.Although the funds are available to all banks, the real target is those in the southern periphery of the euro zone. These were the ones that gobbled up much of the €1 trillion of cheap funding provided in the winter of …

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