The European Central Bank invigorates combating weakening of economic growth and deflation threat by using a safe and proven method. The ECB Governing Council cut the reference rates from 0.05% to zero, but deposit rates for commercial banks — from minus 0.3% to minus 0.4%.
Moreover, from April the ECB increases the volume of quantitative easing programme from €60 to €80 billion a month, under which the regulator buys assets and bonds of eurozone countries.
The ECB uses every effort to force the banks, which remember the recent crisis, to credit economics rather than keep money for a rainy day. Therefore, from June the ECB resumes granting loans to the banks for four years, but the conditions will depend on how extensively a particular bank gives out money to residents. The banks, where pure loan services exceed the benchmarks, will obtain credits from the ECB at a rate equal to the deposit rate, thus, negative. In other words, the ECB will pay extra to the banks for borrowing money.
The financial system is stuffed with liquidity, but it does not overstep the borders of the banking sector. The question is: why the banks do not react or react insufficiently to these arrangements and do not provide credits in the volume required for the economics?
In case of Latvia, there are three reasons.
First, the scars of the cruellest crisis of 2008 – 2010 have still not healed, when the Latvian banking system suffered losses estimated in hundredth of million lats, failing to get back credits issued shortly before the crisis.
Second, today the banks cash, as good as any, on fees for the conduction of various financial operations. Nobody wants to assume credit risks having trouble – free and stable income.
And, at last, the third explanation — it’s not like credits are not given, but rather credits are not taken. Either unremarkable financial results or apathy and the lack of business ambitions lead to alarmingly scarce new loan applications on the tables of the banks’ credit committees.
As a result, the credit portfolio of the Latvian banks over the recent seven – eight years was losing weight all the time and just at the end of the last year the freshly issued credits reached the volume of refundable and written-off credits.
The answer, which has met no response for a number of years: can the monetary incentives solve the problems existing in economics? Relying on Nobel Prize winners, by issuing money it is possible to warm up economics. But also there is another opinion – in nowadays situation the efforts of the central banks (quantitative easing) remind of the efforts, when they try to cure very severe disease with the help of aspirin. But taking pills would make you feel better for a short time, but cannot heal over the long run. Also with the help of just additional cash injections no improvements in the economic situation can be reached either.