In view of the poor economic outlook how will the European Banks be able to repay these proposed loans ?
Of course, it doesn't do anything about the underlying concerns about solvency.
Very important point. The underlying businesses are still in extremely bad shape. All this is doing is distracting from this fact, while at the same time creating inflation.
They are doing what Central Banks are there to do i.e. Be a lender of last resort when the money markets are not functioning. They are not increasing the money supply so they are not creating inflation. The USD liquidity is provided through swap lines between the FED and the various Central Banks. If the ECB want $100 billion to lend to their banks, they have to provide the FED with the € equivalent. It's purely a liquidity measue.
They will be increasing the money supply, just as they did at the onset of the financial crisis. Where else is the money going to come from?
In the last 4 years M1 has risen 26% from €3754bn to €4742bn all in the name of providing liquidity. Watch the monetary figures over the next 6 months, they will be rising just as they have in the US.
I agree that the actions being taken are very different to the purchasing of government bonds, but just because the repos have a time limit does not mean that the money created for them will vanish from the monetary base. It is far more likely that they will be continuously recycled as these banks are not getting any better. I could be proven wrong over the next 12 months, let's watch the various Ms and see.Tell me how they are increasing money supply in a way that will cause inflation. They are providing liquidity through repo's. These repo's are for a fixed period. It is not the same as their other programme of buying Government bonds outright which I agree is a form os Quantitative Easing despite their insistence that they are neutralising the effect by mopping up excess liquidity for the same amount.
I agree that in general M3 is a better measure of broad money supply, but since the crisis and all the money printing it has become a very unreliable indicator. The reason I say this is because of the amount of excess reserves held by banks. I couldn't find the exact amount for ECB excess reserves, but in the US excess reserves are up to $1.5tr. Just because excess reserves haven't filtered through to M3, doesn't mean they won't, and I see nothing that suggests that a sudden drop in excess reserves could be significantly halted.You are better off looking at M3 money supply if you want to use that as an indicator of inflation as it is broader than M1. The 3 month avergage of the annual growth rates of M3 is about 2%. The ECB has a 4.5% annual growth rate as a non-inflationary reference value for M3 so money supply is not indicating inflationary pressures. If anything, the ECB are probably going to start worrying about it and it is why you will probably see 50bps rate cut by year end. Having said that, looking at money supply as an indicator for inflation is dangerous.
Everything the ECB has been doing has been increasing the money supply which has been creating price inflation above a level that otherwise would have existed.
How to save the euro:
A question for those in the know - is this true?"In today’s recessionary world, the ECB could buy several trillion euros-worth of bonds without unleashing inflation"A simple-ish explanation if possible please.