>> GROUP: Shadow ECB Council / EZB-Schattenrat  Dr. Thomas Mayer

Dr. Thomas Mayer: Should the ECB introduce another TLTRO and how should it be designed?

With his comment to do “whatever it takes” to defend the euro, ECB President Draghi has crossed the Rubicon. Now the ECB is the backstop for insolvent banks and states. Within this logic it will have to launch another round of TLTROs. This instrument allows weak banks losing deposits to stronger banks (or to weak banks backed by stronger governments) to replace these deposits with cheap central bank credit. Without the latter, these banks would have to raise rates on deposits and use much more costly funds in the market. They would have to charged higher credit rates, which would depress credit demand and economic activity in their region, threatening the integrity of the euro zone. With TLTROs the ECB subsidises cheap credit by weak banks to risky borrowers. This is on what EMU depends.

Should the ECB change its Forward Guidance?

The ECB should acknowledge the inevitable, namely that it will not be able to raise rates as far as the eye can see. Low rates are another prerequisite for the survival of the euro.

Will the ECB manage to hike rates before the next economic downturn?

With Italy in and Germany at recession the question is rather whether the ECB can cut rates even more in the looming downturn. My answer to this question is that it would be counterproductive, because negative rates are simply a tax on banks. Instead, the ECB will have to buy risky assets from banks to prevent a new banking crisis.
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