TLTRO Rugby

Owen-FarrellNo, not ‘Total Rugby’ (a forum for debating Ruby League). As we write this Italy is about to face England in a 2019 Rugby Six Nations match; England is famous this season for its mostly-successful tactic of putting boot to ball and kicking the odd-shaped object in the expectation of quickly winning it back. Similarly the European Central Bank (ECB) has just kicked the euro-can down the road to Italy’s banks, knowing that it will come straight back to the kickers.

Targeted longer-term refinancing operations (TLTRO), a tool in the Bank’s ‘non-standard monetary policy’ kit bag, have been triggered for the third time. Under this scheme money is lent to a bank on generous terms but with the requirement that the funds are lent to firms for investment in the productive economy. But where will it be invested, in struggling Italian companies in an economy in recession, risking more bad loans? More likely it will come straight back to Germany and other safer territories, after all capital can move freely anywhere in the Single Market, that’s an inviolable freedom.

The creation of the eurozone (EZ) was the single biggest gamble the EU has taken to accelerate the move towards ‘ever closer union’ and the nirvana of a federal super-state. The euro-tacticians knew they were creating conditions for more crises but this has always been their principal means of pushing their agenda forward, every crisis is an opportunity to put new rules and structures in place to resolve it and these always place more power and control in their hands. A good crisis speeds up decision making but with the EZ the fixes are temporary, simply postponing a necessary resolution. Italy cannot pay its debts, so giving more money makes tomorrow’s problem bigger.

Our recent post [1] gives another example of how the ECB action to stabilise the EZ merely stops contagion spreading from the weakest economies to the strongest. After spending a massive 2.6 trillion euros on quantitative easing (QE), largely buying Italian state bonds, a sustainable recovery might have been expected. The program was stopped in December under pressure from Germany; how embarrassing after three months having to resort again to subsidising loans to banks, but with EZ interest rates already negative the ECB has few options left.

Helicopter moneyTLTRO-III is related to what economists call ‘helicopter money’ whereby a central bank prints money and gives it to citizens to spend and stimulate a flagging economy (demand-side stimulus). Instead the money goes via banks to industry to stimulate production (supply side), which also has the effect of staving off a banking crisis. But the money has to be repaid eventually even though it was loaned at negative interest rates. Now the banks, already relying on capital ratios (the money banks must hold to support the loans they make) are dependant on ‘zero-risk’ sovereign bonds that are increasingly risky in reality (especially Italian sovereigns). The real reason for TLTROs is more to do with keeping dodgy banks afloat than stimulating the real economy.

The Germans are culturally averse to the risk of hyper-inflation (since the Weimar Republic and subsequent rise of Nazism) so permitting this creation of money from nothing shows how desperate the situation is. They face a choice of crystallising huge loses or adding to them in the hope that something turns up to avoid the calamity.

The EZ is facing a triple whammy of shaky sovereigns, migrating capital from weak to strong and a massive quantity of IOUs that cannot be cleared at face value without strong growth [2]. Italy hasn’t had real growth since the EZ was created. Can the ECB postpone the reckoning beyond the next global crisis, which is inevitable according to history (and will likely be upon us quite soon)? It’s unlikely. Italy has its own proposals to save its citizens from poverty, especially from the left wing of its ‘populist’ government, but these are being resisted by those in charge of its currency because of the danger to others of increasing the nation’s deficit. This is the danger of the ‘one size fits all’ nature of monetary union across such a diversity of economies; problems spread more quickly than real solutions.

Eng 57 - Ital 14 (2)Italy lost the match, going down to a big defeat 57 – 14 against England. Italy has been a part of Europe’s top rugby competition, the Six Nations Cup, since 2000, almost as long as it has been a member of the eurozone. Sadly they are the least successful of the teams and one of the poorest economic performers amongst the nineteen EZ nations. Its participation in both games is increasingly being questioned.

[1] Money, Money, Money: Funny Money

[2] Italy Missing the Target

 

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