Time is money

ECB a month too late for euro zone shock and awe

The European Central Bank (ECB) is a month late for euro zone shock and awe. The ECB needs to boost the bloc's flagging economy, and buying more debt from its most troubled countries is the most likely palliative. But the best opportunity to act may have passed.

The central bank needs to boost its stimulus when it meets on March 10. Inflation is moving in the wrong direction, with Germany, France and Spain seeing negative rates in February. An anaemic recovery was slowing even before recent market volatility, despite the central bank buying government bonds and cutting the cost of holding cash below zero.

The most powerful tool would be to cut borrowing costs where they are rising most quickly, by tilting purchases more aggressively towards the debt of southern European economies like Italy, Spain and Portugal. Or the ECB could buy bank debt to offset the recent rise in bank borrowing costs.

Both measures would be controversial. The ECB currently buys government bonds relative to its capital key - the respective ownership stake of each member state. That deflects accusations it is funding individual governments. Buying bank debt would complicate its role as financial regulator.

Had ECB President Mario Draghi proposed either measure a month ago in the midst of the February trauma, they might have been easier to push through. The spread paid by Italy over German debt had jumped 50 basis points in February, but has retraced half that rise. While some banks' funding costs remain very elevated, the average 95 basis point level, based on the Markit iTraxx senior financial credit default swap index, is still around 2015 peaks.

Hence less controversial options are likelier. Draghi could lower deposit rates further, or increase overall monthly bond purchases from euro 60 billion, in line with the capital key. But the former would hurt bank profits, while the latter could break ECB rules limiting ownership of government bonds to a third.

Draghi's easiest option would be to make a cut less painful for banks with excess cash, or give lenders even more longer-dated cheap funding on looser terms. Both could marginally improve things for banks in southern Europe. But neither is likely to administer the stimulus Europe increasingly needs.