The compromise of Dragons. Oxygen to the southern banks and for companies in the north – Rai News

The latest moves of the ECB’s President have been variously commented, acclaim in Italy, hostilities in Germany. The almost schizophrenic behavior of the markets and the exchange rate, yesterday the stock markets closed in the negative today have soared driven by banking and industrial. With each passing hour the Dragons looks more crisp. Measures to alleviate the plight of southern European banks and other large companies to finance directly with France and Germany intended to do the lion’s share. All this will serve to beat the deflation specter? We discussed it with Marcello Minenna, finance professor at the London Graduate School Mathematics

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Luca Gaballo March 11, 2016 Professor, Draghi has launched a major expansion of the QE both in qualitative and quantitative terms, why the euro has appreciated yesterday instead of going down, and today the closure delel trading still remained around $ 1 and 10?
All trading on the FOREX market are based on market expectations. Much of the effect of the measures taken by Draghi had already been incorporated by the market exchange rate before the announcement yesterday; Euro / dollar weakened by about a 5-6% during the past month, starting from the meeting of 4 February. As a result, sensitive information have been those related to future movements in interest rates and the inflation rate. In the first case Draghi has clearly reduced to a flicker the chances of further cuts. But the main driver of the exchange rate movements were new forecasts on future inflation released by the ECB, truly disturbing: in fact, the ECB has lowered its estimates for inflation growth in 2016 from 1% in December 2015 0.1% yesterday.
of course it is a sudden slump which raises doubts on the reliability of the ECB also forecast systems. But the interests of FOREX traders remain quite concrete: this new estimate implies an inflation differential with the US that suddenly widens by 90 basis points and this can not help but strengthen the Euro for simple arbitrage mechanisms of financial flows.
But if the ECB fails to influence the exchange rate, as a result is able to determine which signal is launching to the market?
Until now indeed the ECB has been quite successful in driving the euro / dollar to a permanently lower level change. This type of policy, however, encounters structural limits when they are no more possible moves on interest rates (and it seems we have reached the final floor for the Eurozone) and inflation expectations remain outside the control of the Central Bank. Now we are exactly in this second case. It also considered that an exchange rate is always bilateral, that is also affected by what happens in the economy of reference of the other currency. In the case of the Euro / Dollar exchange rate, the momentum to the strengthening of the US dollar (and therefore the weakening of the Euro) has fallen a lot since the expectations of a continuation of the rate hike cycle collapsed.

signals to the market, in my opinion, there are all; I expect that in the coming days there will be an adjustment towards more balanced values, both on the FOREX market or on that of European government bonds.
From a more general perspective, the markets are still realizing that the ability to intervene monetary policy has been declining in recent years. For this reason the focus is rapidly moving on the hot topics related to the pooling of risk within the eurozone and reforms that could increase the range of the ECB and release the “hand locked” European economic policy: the lever tax.
Among the most alarming news spread yesterday by Draghi there is an estimate of inflation to 0.1% in Europe throughout 2016. a worsening profit outlook despite a year of QE. It ‘was all for nothing?
From my point of view, is the most alarming news of all. Deflation is strengthening across Europe, it is changing the long-term expectations of the operators, the SO-CALLED core inflation. This is an essential point, because these expectations very slowly respond to external stimuli, are very difficult to change and influence the dynamics of prices in a penetrating way.
Think Italy ’80s: because we came from a decade of consistently above 10% inflation, traders continued to expect a rise in prices in the long run despite the Bank of Italy had made independent from the Treasury and had started highly restrictive monetary policy, with interest rates on BTP 15%. The disinflation process has been slow and painful, and certainly not without costs.
Sure, President Draghi said that without QE deflation would be much worse than it is; in this way it confirmed the effectiveness of the bond purchase program in terms of “levee” to a stronger than expected deflationary process. It is a brilliant rhetorical defense because no smentibile by counterfactual observations.
I believe that QE has had its usefulness in keeping the very low interest rates and allowing stabilization of credit to the economy dynamics real. But inflation, which has dominated ictu oculi the collapse in oil prices, I believe the effect was modest.

The decision of the ECB board yesterday was preceded by strong polemics against further adoption negative rates which would penalize not only the banking system but also insurance. Draghi, in your opinion has managed to overcome these objections, also saw the triumphant chisuura now of bank shares in Italy and in Europe?
We start from a key consideration: the negative rates make it more difficult for banks to obtain profits through the traditional net interest income channel. Moreover, as banks turn risks and deadlines, to favor profits is very important that the “slope” of the interest rate curve is adequately steep; QE actually tends to flatten the curve of interest rates, pushing long-term interest rates to approach short ones. Even this is not good for the operations of the banks.
Is well known then that low rates will negatively affect the profitability of any financial investment, and consequently as insurance and pension funds that base their business on core stability and predictability of its long-term financial investments.
fact, it can be estimated (and it was done) that the profitability of the banking system’s total was hit, although official figures show a moderate recovery in bank profits. Even here, in the presentation of data, the ECB plays on the fact that you can not prove that with higher rates the profits would have been far greater. However, I believe the commitment declaration of Draghi not to lower than the rates may be a sufficient guarantee for the banking system, to which are offered other mechanisms, including mediation on government bonds, to stabilize their profit margins .
the banking system has a new tool available to the Tltro, designed to encourage the granting of loans to the real economy. These would offer credit lines to banks loans to more negative rates compared to – 0.40% of the standard, up to a maximum of 0.4% of depositodi refinancing rate is the rate of the reserves at the ECB deposit. The mechanism function? We are sure that the real economy will benefit if? What penalty would suffer banks for allocating these funds for other purposes?
It is a valuable attempt. The ECB has eliminated the clause that the loans that were not transferred to the economy had to be obligatorily returned after a year, probably due to the limited success of this kind of disincentive.
Stick Since we moved to the carrot: now it is standing a complex system of incentives to allow banks to earn risk-free profits through the expansion of credit to the economy. Basically, the more a bank lends to businesses, more discounts will have on the future TLRTO rates. The mechanism is interesting; more than anything else are skeptical on the order of magnitude of these benefits.
If it will be like I think fairly marginal, the capital requirements as to lie in against the loans will remain the key factor that will influence the employment decisions of banks. At the time, the investment in government bonds remains by far the most cost effective and safe option for the banks: they can easily mediate a profit by buying and selling with the ECB and have a favorable treatment in accounting terms, since, unlike the loans, government bonds are not asking for the provision for special capital reserves.
there is thus no specific penalties for banks that were to decide not to disburse loans to the economy. Certainly not receive the discounts, but I think at least until will remain in force on the QE, the incentive mechanism will be displaced by the purchase of government bonds.
The ECB, persuaded that the system banking is no longer sufficient in the real economy drive belt will buy corporate bonds directly. What features should have these obligations?
The Eurozone system remains bank-centric. Banks have too much weight in the intermediation of credit to the economy. Surely Draghi has activated a second channel to try to stimulate the dynamics of the real economy, and this is a signal that the bank credit market is steadily getting worse, also because of the enormous weight of impaired loans.
Bonds must be of non-financial European companies, of good quality. They are excluded by purchase of the ECB’s notorious subordinated bonds, while they seem not (yet) be no limit on the duration. The earliest estimates (v. Figure) on this market tell us who should be eligible to purchase about 550 billion € of bonds. The lion’s share would (not surprisingly) France and Germany respectively 209 and 122 billion purchased securities, 60% of the entire market. This seems to give rise in part to suspicions that the program is the result of a compromise with the core countries to give green light to the expansion of the QE. I expect, however, that as with other programs, already in the short term there will be a beneficial “effect-ad”, with a reduction in spreads paid by large industrial enterprises and market conditions more favorable to the issue of new debt.