Wednesday, May 28, 2014

What ECB can do to avoid crisis.

One is they can further reduce their overnight reference rate, which is now 25 basis points. They could knock that down to zero.

The second thing is that they can charge member banks for leaving money at the European Central Bank (ECB). Right now, they pay zero, but they can reduce that to negative territory. In other words, they can say to banks “you have to pay 50 basis points to leave the money here,” which encourages banks to lend the money.

They can also get involved in so-called quantitative easing (QE), go out and simply buy various forms of securities, but it’s not as easy for them as it is for the Fed because there’s 18 member countries in the ECB. They don’t just go out and buy Treasuries, they have to think of 18 different issues of government papers.

They say they’re going to do something in early June unless things change dramatically, but they are clearly concerned about deflation.