Eurozone and Ireland Still in Crisis
Sometimes we miss some of the important announcements that come to the market because people are weary of bad news. At lunchtime on Thursday 5th June, Marie Draghi announced that the ECB cut the Interest Rate to 0.15% to stimulate recovery in the Eurozone. This means that the European Central Bank have cut the deposit rate for lenders that hold money with them from 0 to - 0.1%. This effectively means that for Banks that hoard cash, which has been continuing throughout this crisis, they are now being penalised, encouraging them to lend to all sectors.
Obviously this is good news for those on tracker mortgages who will stand to gain from this in the Eurozone area. However, on a more worrying note for the rest of the ECB, drastic cuts of this nature where Banks are penalised for depositing money with the ECB can only mean one thing - the Eurozone is still in crisis. The Banks are still broken.
It is remarkable that the RBS economist Richard Barwell has suggested that Draghi should announce "a bundle of measures to avoid disappointing the markets." I am sure Mr Barwell will agree that not only will the markets be disappointed but the millions of unemployed, those struggling with mortgage debt and the overhang yet to be addressed within Eurozone will be extremely annoyed that this is the best solution the ECB can so far deliver. We are hoping and we remain hopeful that further rate cuts and targeted measures to help boost lending to small and midsized firms (SME's) will happen. It looks as if the Eurozone are going to follow Quantitative Easing, similar to that of the USA and the UK. Without further Asset Purchases to introduce liquidity into the market place we are going nowhere fast.
In essence, despite the press coverage that the Irish and European Economy is improving, rate cuts to this level do not indicate an improving economy. In fact, the possibility of asset purchase programs in the EU do tend to suggest that the Eurozone is contracting as the target inflation of 2% now runs at 0.5%. It is noticeable that these rate cuts are not being passed to businesses who are suffering within the Eurozone and this does not order well for the UK and Ireland. In particular, it demonstrates the malaise in the Eurozone and generally throughout Europe.
So what should we make of all this? Caution, Caution, Caution when reading upbeat press stories regarding the Banks in Ireland. Their “recovery” and that of the commercial property sector is purely driven by poor returns on equities and other markets, as funds need good homes for their money with some form of decent return.
Is it any surprise then that the property market is on the bounce? But how long will it last?