Moving at last

Draghi's smart bombs are powerful but late

Mario Draghi's package has finally arrived, after almost two years of inaction. The European Central Bank has long stood guard over dismal inflation and a faltering recovery, with no major policy action since August 2012. Bad inflation numbers in May, and shrinking growth and inflation forecasts, finally prodded it into action.

Instead of the bazooka of private asset purchases that some expected, the response is a series of precise measures with varying effect. Cutting the deposit rate below zero - a territory no major central bank has ventured into before - will lower money market rates. But the 10 basis point cut of the main refinancing rate will have only limited effect. The decision not to sterilise previous government bond purchases will increase market liquidity, but the effect will decline as the bonds mature.
 
The ECB will also offer banks fixed-rate, four-year money if they increase lending. That's the awkward-sounding but potentially powerful TLTROs - targeted longer-term refinancing operations. The goal is to entice banks to lend to small companies and simultaneously bring down medium-term rates. If they are priced at 25 basis points, TLTROs should enable even strong banks in southern Europe to cut funding costs by up to a percentage point, according to Breakingviews estimates - a significant subsidy for a programme in excess of euro 400 billion. How much more the banks will have to lend is unclear: if they don't hit a yet-unknown benchmark, the ECB will force them to repay the money.

The missing weapon is a significant programme to purchase private assets (public ones are off-limits). Draghi says the ECB will intensify efforts to kickstart a market for securitised debt backed by small company loans. But for that, bank and insurance capital rules need to change, and loan data must be made transparent and accessible.

The implication is that asset purchases are way off, and TLTROs the main show. The market is unimpressed: the euro quickly recovered on June 5 the losses triggered by the ECB's initial announcement.

Draghi faces an uphill slog. Other central banks may become more aggressive if the global recovery falters. And even loose monetary policy can't deal with Europe's real problems: high unemployment, uneven economic reforms and overly rigid fiscal policy. The ECB expects the euro zone as a whole to have a deficit of 1.9 per cent of GDP in 2016. That's a ridiculous level for an economy in turmoil. Draghi is fighting the slump with limited tools to the best he can.