This Thursday the ECB kept its promise and raised interest rates again, leaving the bank refinancing rate at 3.50%. And although what happened in the US, added to the problems of Credit Suisse, has resulted in sharp falls in European banks, the message is clear: we must not be intimidated by the panic in the markets.
Lagarde’s intervention can be summed up in a warning to sailors who speculate in the eurozone: the ECB has the tools to attend to bank liquidity and maintain risk premiums at acceptable levels. And that threat is more than credible. We saw it in 2012, with Draghi’s “whatever it takes” and his OTM; again between 2015 and 2019, with purchases of public debt and TLTROs (three-year loans to banks); as in 2020, with another 1.7 trillion euros to face the pandemic; and, finally, also in 2022, with the Transmission Protection Instrument to avoid problems for the public debt of the south. Therefore, when Lagarde claims that the ECB has the mechanisms to weather the situation, believe her. It has them even though the situation continues to be volatile: if it got worse, his legs would not tremble as he expanded, once again, his firepower.
However, and although this crisis is not that of 2008, what happened should not be downplayed: it points to a no lesser element of weakness. Because the collapse of the American banks reflects losses in assets acquired when interest rates were particularly low, pointing to that of the arsonist: the policy of the central bank, dramatically reducing interest rates, fueled bubbles in real estate and financial assets ( including public debt) and, finally, contributed to the increase in the CPI. In this situation, to which those have risen to kill inflation, we have begun to visualize the collapse, more or less controlled, of the previously generated bubbles.
Over the last decade, the ECB and other central banks have slipped down an unknown slope, structurally changing their role: from lenders of last resort to banks to lenders to governments and, indirectly, to generators of financial instability. Bad business for our ECB: its bailout programs, initially unavoidable, have been piling up on its balance sheet, leaving it caught between the sword of inflation and the wall of instability. And although Lagarde separates the objectives of reducing the increase in the CPI (with an increase in interest rates) and those of financial stability (with greater injections of liquidity), this does nothing more than postpone the day of the adjustment. Difficult voyage: because it is bad if, to control inflation, it generates losses in asset prices; but it would be worse if, in order not to destabilize them, it allowed inflation to skyrocket.
