The ECB protects banks in their fight against inflation and offers them profitability for having the money parked

Banco Santander accumulated a rise in a bag of almost 9% only between 3:30 p.m. on Thursday and the closing of its price on Friday. Exactly, since it was known the latest decision of the European Central Bank (ECB). In this same period, BBVA shares rose 7.3%. And Caixabank increased its value on the stock market by 6%. This 'joy', extended to the entire financial sector of the eurozone, sounds paradoxical in a context in which the European Commission admits the risk of a contraction in economic activityand in which there is a threat of a cut in the flow of Russian gas due to the war in Ukraine that would worsen the recession.

To understand the optimism reflected by the banks on the stock market since Thursday, we must attend to the ECB's decision to protect the sector in its fight against inflation, favoring the improvement of its business margins and offering them profitability for having the money parked. That is, it increases your ability to convert income into profit.

In part, because the institution that directs the monetary policy of the eurozone allows banks to make profits without 'moving' the "excess liquidity" (without lending or investing that money that it does not need in the short term) —and that is good They have obtained part of it for months and will continue to obtain it at an extraordinary cost, with credit lines from the ECB itself designed as a response to the COVID shock, when there was fear of a lack of liquidity.

The monetary body tightens the financing conditions for mortgages, companies and the States to stop fueling price increases, from which the same financial institutions also benefit directly, by raising the interest at which they lend the money (their margin of intermediation) although this affects the risk of recession (lower consumption, lower investment capacity...). "It is a strategy of appearing the most and tightening the minimum," summarizes the researcher Víctor Gómez Blanco.

"The most important announcement of the ECB [de este jueves] It was not the 0.75% rise in reference rates, it was the sneaky nod to excess European liquidity and the banking sector," agrees economist Alfonso Peccatiello.

The president of the ECB, Christine Lagarde, announced this Thursday that increase in reference interest rates of 0.75%, the largest in the history of the eurozone, up to 1.25%. Another rise after the first in July of 0.5%, from the 0% at which rates had been maintained for years to favor the exit of the Great Financial Crisis of 2008, first, and to overcome the pandemic, later. And he announced that he will continue to raise them in the coming months.

In the same way, the institution raised other reference rates, such as the so-called "deposit facility"which remains at 0.75%, which is the interest at which banks can park money in the central banks of each country, as is the case with the Bank of Spain, even if they have obtained that money at a lower cost in programs deployed by the ECB to guarantee liquidity, which are currently maintained.

The banks thus have a remunerated 'mattress' – with this operation "they will earn on average up to 1.5%", Alfonso Peccatiello points out. And, at the same time, interest rates have been rising and will continue to rise for those who grant mortgages, renew them or those who finance the activity of companies.

It is the strategy adopted by the ECB, and it is based on cooling down the economy with this increase in the cost of loans, which, in addition to the "wink" at the bank, faces other contradictions.

Thus, on the other hand, the rate hikes are added to the end in June of the debt purchase programs with which it has created money to guarantee demand in the financial markets for years, and precisely enhance growth and economic recovery .

Especially in the States with the most fiscal imbalances, such as Spain or Italy. But, precisely with the aim of not suffocating these most over-indebted countries, the ECB continues to support them, with different tools. In short, without reducing this mountain of money that has been created in the last decade.

They are not just contradictions. The ECB's strategy also meets with numerous critics. The first is that the origin of this inflation crisis lies in energy. The second is that this same price crisis for oil, natural gas and other raw materials was exacerbated by the Russian invasion of Ukraine.

Neither crude oil nor gas will respond to a tightening of financing conditions. Ultimately, they will react to sinking demand, if the recession deepens, but even that will not prevent the threat of gas flow cutoffs from Russia or production cutbacks by the dictatorships that produce most of the oil. Much less will a rise in rates affect the war, a humanitarian and geopolitical issue.

Finally, "the decision comes while the indicators show growing risks of recession, and while people see how their real incomes are drastically reduced," they recall from Positive Money Europe. this very friday, the OECD advanced that wages in Greece and Spain they will be the ones to lose the most purchasing power this year within the eurozone. Up to 4.5% in our country.

Indeed, the energy crisis itself and the uncertainty caused by the war have already chilled the eurozone economy, so "the ECB's decision is unjustified, unfair and risks slowing down the green transition, and is unlikely to reduce prices”, continues the team of economists of this non-profit organization based in Brussels. "Again, it will disproportionately affect low-income households who already have higher bills to pay."

Yes, there is some consensus that the best reason (or the only one) to raise official interest rates is the sinking of the euro at its crossroads with the dollar, to which Lagarde herself referred this Thursday.

It is because the United States Federal Reserve (Fed) has been effectively more aggressive than the ECB in recent months, turning the dollar into a vacuum of money in international markets. This policy has caused the return offered by the debt denominated in the greenback to rise sharply, as a result of the rise in interest rates on the other side of the Atlantic, where they are already at 2.25%.

The weakness of the common currency, which has depreciated 20% against the dollar since the first days of 2021, translates into cheaper exports [lo que se vende fuera], but also in a higher price of imports. And the most important bills paid by the eurozone states in dollars are for energy raw materials, already skyrocketing.

“The best way to see how much things have changed is through the eurozone trade balance, which, after years of surplus [se vendía más de lo que se compraba fuera]it now has a deep deficit,” says Robin Brooks, chief economist at the IIF.

From an aggressive cycle of interest rate hikes by the ECB, it can also be understood that there is confidence in the strength of the eurozone economies, even that a debt crisis and increases in risk premiums like the one in 2010 and 2012 is remote thanks to the totally different starting point due to the extraordinary financing conditions of recent years.

“Spain remains in a growth path despite the energy crisis, the tightening of monetary policy and the uncertainty due to the Russian invasion of Ukraine”, argued, in this line, Nadia Calviño, first vice president and minister of Economic Affairs, who influenced, this Wednesday in Congress, in the burden of public debt [lo que el Estado gasta cada en año en la factura de intereses] continues to decline even if interest rates rise.

This financial burden or interest bill on public debt remains close to 2% of GDP, far from 3.5% in 2013, and is around 5% of public revenue, well below the 9% it exceeded in those years of the euro crisis, just after the bank bailout.

Calviño insists that Spain presents clear differences with respect to other economic cycles, compared to other crises. And one of these differences is precisely the "sustainability of public finances", in the sense that paying the debt requires less effort on this occasion, after years of expansionary (and extraordinary) monetary policies that the Public Treasury has taken advantage of.

This "sustainability" is also reflected in the objective of reducing public debt below 110% of GDP, after soaring in 2020 above 120% due to "the cost of the response to the pandemic", and the measures that the energy and inflation crisis are demanding. Calviño also clung to the objective of reducing the budget imbalance, the deficit (what is spent compared to what is received), from 5% in 2022 and 3.9% in 2023.

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