Soon after taking charge, the European Central Bank President, Mr Mario Draghi, has done for the euro zone what the Fed Chairman, Mr Ben Bernanke, has been doing for the US for years in a more direct fashion (by buying up huge quantities of treasury securities, lowering their yields - and, as the icing on the cake, handing interest receipts right back to the treasury, as central bank profit).

 Yields on euro debt have stopped rising and will soon begin to fall, as euro zone banks, flush with money (they picked up half a trillion euros in December, as a low-interest three-year loan under a long term refinancing operation (LTRO), and another half trillion is on offer in February) look around for a place to park their funds.

 This can make the difference between sink and swim for many economies; the difference between Italy managing to rollover its debt at four per cent, and being forced to start shelling out seven per cent.

With GDP growth in most of Europe likely to remain muted this year, the one sure way to keep debt under control is to get borrowing costs back to more affordable levels. 

Responding to a pointed query on this, Mr Draghi said that basically the money was given to encourage banks to step up their lending, particularly to small and medium enterprises, which ‘account for about 70 per cent of employment in the euro area's corporate sector'; but in the end what banks do with the money is their own business.

The ECB, Mr Draghi explained, cannot get into the business of financing the deficits of its member countries -  and anyway it would be hard for it to help anybody if it ended up undermining its own credibility in the process.

Last month, in the first few weeks after the € 489 billion were auctioned, banks deposited record amounts into the European Central Bank, at a lower rate than they borrowed it.

Mr Draghi says that the banks which (temporarily) turned in the money were ‘by and large' not the ones who took it out. Whether or not this was so, it would be worth keeping an eye on commodity prices, stock markets in and outside Europe, and higher yielding non-euro zone debt in the weeks to come.

(This article was published on January 22, 2012)
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