The European Central Bank (ECB) yesterday expressed disappointment that the liquidity it has pumped into the banking system in recent months has not fed through into the real economy more quickly.
"We had hoped the LTRO [Long-term refinancing operations] money would go faster into the real economy," ECB president Mario Draghi told the European Parliament's Committee for Economic and Monetary Affairs.
In two separate LTROs, in December and February, the ECB pumped more than €1 trillion (Dh4.8 trillion) into Eurozone banks in a bid to avert a dangerous credit crunch. The money was made available to banks at rock-bottom interest rates in the hope they would lend it on to households and businesses, thereby keeping the Eurozone economy up and running.
But available data so far appear to suggest that lending activity remains low and banks are tending to park the cash on deposit at the central bank rather than loaning it out.
Draghi insisted the process would take some time.
"We are confident that central bank liquidity has come very close to the real economy. Of course, this does not mean that this will by itself boost lending to firms and households," he said in a regular hearing.
"It is encouraging to observe that a very large number of small banks have participated in the two LTROs. Small banks are best placed to refinance the real economy, in particular small- and medium-sized firms which are the biggest generator of employment in the economy," he said.
There is also evidence to suggest that banks may have used the money to buy up the sovereign debt of debt-wracked countries, a practice the ECB would strictly speaking be opposed to, since it would be an indirect form of so-called "monetary financing", or central bank financing of governments, which is banned under the ECB's statutes.
"This has to be overcome," Draghi said, while noting that the situation on the bond markets had nevertheless "markedly improved".
"In the first three months of this year, we had bond issuance equal to the whole of last year" and that was "positive," he said.
The ECB itself has also, under a special Securities Markets Programme (SMP), been making very limited purchases of sovereign bonds. The move has been deeply controversial, even causing two prominent German ECB members to resign.
But the SMP programme was "neither eternal nor infinite," Draghi insisted, arguing that ECB was treading a very fine line but had to "act to within limits of our treaties. It would be no good for monetary union if we were to step outside the limits established by our treaties," Draghi insisted.
He refused to say whether the SMP programme, which has lain dormant for the past five or six weeks, would be re-activated to help Spain. As he was speaking, the ECB published the results of its regular quarterly survey on bank lending. And it found that a tightening of credit conditions had declined "substantially" in the first three months of this year and banks were expecting that trend to continue in the second quarter as well.
"Overall, the results of the lending survey are positive," Draghi told the EU MPs. "The impact of the sovereign debt crisis on funding conditions has decreased... but it will take some time to feed through" into the data, he argued.
Draghi insisted that the LTRO operations had succeeded in "buying time" for policymakers to solve the long-running sovereign debt crisis.
"The LTROs have been quite timely and all in all successful and if the only thing we managed was to buy time, then that is an extraordinary success," he said. "Buying time is not a minor achievement."
Nevertheless, the ECB could only do so much and "the ball is entirely, squarely in the court of governments and banks, and they have to use this time," he said.