A bet with access to the endgame – Newspaper Kommersant No. 45 (7490) of 03/17/2023

The European Central Bank was forced to proactively raise key interest rates by 50 basis points at its meeting – the key rate in the euro area is now 3.5% per annum. The decision is clearly related to the risks of destabilization of the EU financial market due to the problems of the Credit Suisse group, and further prospects for European monetary policy are not obvious – the ECB forecasts published on Thursday are no longer relevant to reality, since they were made in early March and are devoted to the risks of the eurozone in case of too fast economic recovery in China.

According to the head of the ECB, Christine Lagarde, the governing board of the European regulator did not consider other options, except raise three ECB rates by 0.5 percentage points: the base rate on loans increased to 3.5%, the deposit rate – up to 3%, the margin – up to 3.75%. At the same time, the ECB published a revised macro forecast for the euro area (in which, in particular, the bank’s analysts’ expectations for inflation in 2023 were reduced to 5.3% per annum, and a separate session was devoted to the risks of the eurozone in the event of a too rapid recovery of the Chinese economy, which could negatively affect investments and the balance of payments of individual eurozone countries) – this forecast had to be de facto disavowed by the regulator in a statement following the meeting of the governing council, since it was calculated according to data at the beginning of March.

Since then, exactly one change has taken place, not explicitly mentioned in Christine Lagarde’s statement and the ECB press release, but briefly described already in its second paragraph: maintaining price and financial stability in the euro area. The banking sector in the euro area is robust, with strong capital and liquidity positions. In any case, the ECB’s toolkit is fully prepared to support liquidity in the euro area financial system if needed and to maintain an effective transmission of monetary policy.”

The default figure here is the fall in share prices of the structures of the Swiss group Credit Suisse (CS): the group, which has been planning business restructuring since 2022 after losses in a number of Asian markets (the largest shareholder of the group is the sovereign funds of Saudi Arabia), has become a possible target for the spread of banking instability that began after the bankruptcy of the US banks Silvergate and SVB.

Already on the morning of March 16, CS received a statement about possible liquidity support of more than $50 billion from the Swiss authorities, and the falling quotes of the group moved to growth. However, unlike the sectoral SVB, CS is one of the largest diversified financial groups in the EU, and the decision of the ECB to raise rates to a significant level for the eurozone of 3.5% per annum (with an ECB “target” of 2%) looks designed to raise yields in the EU markets and thereby sharply reduce the incentives for banking panic and exit from European assets.

Further actions of the ECB are not yet obvious: there are no signals about them in the bank’s statements, while Ms Lagarde commented on them with a message that is difficult to interpret that the bank has “no strategic choice” between price and financial stability. It should be noted that the possible spread of the financial crisis to the EU is not directly related to inflation (a decrease in demand and business activity in the euro area will rather be an anti-inflationary factor), and a hypothetical crisis (if it happens) will not affect the periphery of the euro area, which is now affected by inflationary processes, but rather its “old” part. The economic fate of the “periphery” of Europe, including the EU countries outside the euro area and its trading partners (including the Russian Federation, which continues limited trade with the EU), is difficult to predict in this case, and the trajectories for each country will be even more individual than in crisis of 2008-2009.

Dmitry Butrin