Trial now
By Silvia Marchetti
     ROME(MNI) - The European Central Bank could hike the interest rate it pays
banks on their deposits together with providing a fresh round of cheap loans to
lenders via its targeted longer-term refinancing operations, former ECB
Executive Board member Lorenzo Bini Smaghi told MNI in an interview.
     A delay in raising rates beyond the summer, let alone until 2020, would
penalize the eurozone's financial sector, said Bini Smaghi, who served on the
Executive Board from 2005 to 2011 and is currently chairman of Societe Generale.
The ECB's current guidance is for rates to remain unchanged at least through the
     "The ECB could consider in the meantime a slight hike in the deposit rate
from -0.40% to at least -0.20% within this summer, which would benefit the
system and paradoxically have an expansionary impact on the economy, while
keeping its main refinancing rate unchanged", he said, calling the negative
deposit rate a tax on banks.
     Even though "liquidity is abundant across the whole bloc and credit
conditions are not an issue, the problem is rather how negative rates are
penalizing the financial sector, weighed down by a sort of tax burden," he said,
noting how eurozone banks were at a disadvantage relative to their counterparts
in the U.S., where the Federal Reserve has raised the target range for its
benchmark funds rate to 2.25% to 2.5%.
     The commitment by the ECB, which ended net asset purchases in December, to
reinvest its maturing securities for an extended period past the time when it
first raises interest rates may not be enough to tackle a slowdown and support
inflation targets, he said.
     "A rise in the deposit rate could come as part of a new monetary policy
package together with a fresh round of TLTROs with a 2- to 4-year maturity,"
said Bini Smaghi, adding that such a move was very likely under consideration by
the Governing Council, and that it was crucial that the ECB should inform
markets quickly of its plans regarding TLTROs.
     Prior rounds of TLTROs have to be repaid in 2020 and 2021, but they begin
to fall out of banks' net stable funding requirement calculations as of the
middle of this year.
     Italian banks in particular will be affected, data shows. But Bini Smaghi
noted that the need for extra TLTROs "would have to be properly weighed on a
pan-eurozone basis. The ECB will never make a move targeted to one country's
needs or following requests from specific banks."
     In addition to TLTROs, the ECB has other tools with which to support the
economy, including one-year long-term refinancing operations, Bini Smaghi said.
Unlike TLTROs, LTRO loans are not tied to lending to the real economy.
     Despite his concern for the needs of the continent's banks, Bini Smaghi
said the eurozone is not slipping into recession, and that recent weak data were
balanced by wage growth and job creation which continued to support internal
     "Even if the slowdown does continue it wouldn't lead to a dramatic scenario
unless external shocks materialize, the most critical one being a disorderly
Brexit, which is more risky than trade tensions", he warned.
     But the eurozone's Achilles heel remains Italy.
     "Italy's slowdown is more severe than in other EU countries. The German
economy is experiencing a setback but remains very robust. Spain is dynamic and
there has been no Italy-contagion. Even France is doing pretty well."
     Tensions between Italy and the European Commission will rise over the next
two years, despite the recent agreement averting an Excessive Deficit Procedure
over the country's 2019 budget.
     "The main issue for Italy is not how budget talks with the European
Commission pan out in the short run, but how the issues related to the 2020-21
budget will be resolved," Bini Smaghi said, identifying a potential flashpoint
in the so-called "safeguard clauses" committing Italy to raise value-added tax
by around E23 billion in 2020 and by almost E29 billion in 2021 in the absence
of alternative measures.
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$E$$$,M$I$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]