SILVER BULLET? Doom, Gloom and the ECB’s Big Bet

Banks used to be the European Central Bank’s biggest allies. But many doubt that its radical new monetary policy approach will really stimulate the euro-zone economy.
Mario Draghi and UBS Chairman Axel Weber. The support of bankers for the ECB's policies has waned.


Is it really worth it? That’s the question that many banks in Europe are asking after the European Central Bank last week launched a massive and historic quantitative easing program to buy government and private bonds.

It is the latest sign of cracks forming in the once-invincible veneer of a central bank. Bankers and markets in Europe are asking themselves: Just how much control does a central bank really have over the path of the economy?

Even many critics of the ECB’s new €1.1 trillion bond-buying program concede that the Frankfurt-based institution has had no real choice in the matter – it must do what it can to prevent debilitating deflation and boost Europe’s anemic growth.

But at the same time, many bankers around Europe fear the stimulus program won’t be worth the effort.

Widespread doubt indicates that trust is dwindling in the “silver bullets” that are being used by central banks to keep the economy afloat.

Very few bankers believe the quantitative easing measures will really increase lending to businesses and consumers – in other words to the real economy.

That widespread doubt indicates that trust is dwindling in the “silver bullets” that are being used by central banks to keep the economy afloat — and the concerns are not just about such tools as bond buying.

“I don’t have any illusions about the ECB program’s chances for success,” said Jörg Zeuner, chief economist at KfW, the German government-owned development bank.

Like many of his colleagues, Mr. Zeuner fears that the transmission mechanism between central banks, banks and the real economy no longer works. Increasing the amount of money in the system no longer leads automatically to more lending and hence to more investment, he said.

Mr. Zeuner explained that, with the announced purchases of bonds, the central bank will expand the size of its own balance sheet and create a higher circulation of money between banks. But these banks must still be able to risk issuing a loan, and that is far from the case everywhere in the euro zone.




“First, Italian and Spanish banks must get rid of their bad loans,” warned Uwe Burkert, chief economist at Landesbank Baden-Württemberg (LBBW).

Mr. Burkert, who is also a management board member and responsible for corporate clients at the bank, said the ECB’s stimulus program would not reach small and mid-sized companies, especially in those European countries that are still in crisis.

“They are the ones most in need of better access to the credit market,” he said.

This doesn’t mean that the €1.1 trillion program will have no impact at all. It likely will push the euro’s exchange rate downward – and many economists hope a lower-valued euro will boost European exports by making companies in Europe more competitive.

The flood of money could also increase stock prices, which would help companies that already have access to the capital market. The ECB hopes that financial firms will sell government bonds to them in the bucket loads – and use the free space on their balance sheets to issue more loans to businesses instead.

The criticism of the program is harshest from those outside the euro zone – bankers there don’t have to consider their relationship with the ECB.

“Europe first needs to straighten things out with its banks,” said Axel Weber, former head of the German central bank, the Bundesbank, and currently president of the large Swiss bank UBS.

I don’t have any illusions about the ECB program’s chances for success. Jörg Zeuner, Chief Economist and board member, KfW

He said banks now are more concerned with amassing additional capital than with issuing new loans.

Part of the blame also lies with regulators who are demanding higher and higher security buffers at banks, said Gary Cohn, a member of the management board of Goldman Sachs. Any capital freed up by the ECB’s moves will be held onto by the banks in order to meet the new regulatory requirements, he said.

Mr. Burkert, the LBBW economist, believes the central bank made another mistake in constructing the program. Just last year it started charging banks a small penalty interest rate for parking their excess reserves with the central bank.

“The negative interest rate of the ECB lessens banks’ interest in selling their sovereign debt,” he said.

If banks can’t issue their freshly acquired capital immediately as a loan, they will have to park it temporarily at the ECB, which demands a penalty. That’s the reason given by the large Dutch bank ING, which announced it would not sell bonds to the central bank for now.

There are other reasons why many bankers are skeptical of the ECB’s stimulus. They fear for their profits, as the new flood of capital and even lower interest rates has put new pressure on margins.

The program will lead to extremely low interest rates and a “real destruction” of profit margins, said Anshu Jain, the co-head of Deutsche Bank. “It’s going to have a profound impact on all aspects of our business model.”

A management board member at another European bank, who declined to be named, said the negative reaction marks the “beginning of disillusionment” with central banks.


Earlier this month, the Swiss National Bank unexpectedly decided to abandon what was essentially a fixed exchange rate with the euro, by lifting a cap it had placed on the franc. That began a discussion about the power of central banks – and the trust that investors have long placed in them. The most extreme skeptics fear that trust in central banks has been lost completely.

Marc Faber, a fund manager who has become known as “Dr. Doom,” expects 2015 to be the year when financial managers recognize that central banks can no longer control markets with their monetary policy.

Albert Edwards, an analyst at the large French bank Société Générale, had a similar warning. “The risk is that markets lose their faith in central banks,” he said.

But from the ECB’s perspective, it is precisely because of that lack of confidence that it had no choice but to proceed with its bond-buying program.

One former ECB central banker said: “What would happen if a central bank said we can no longer fulfill our mandate – that we don’t know what to do any more?”


Michael Maisch is the deputy head of Handelsblatt's finance desk in Frankfurt. Holger Alich, Elisabeth Atzler, Peter Köhler, Katharina Kort, Thomas Hanke, Katharina Slodczyk and Christopher Cermak contributed to this story. To contact the author: [email protected].