Draghi's full Monty explained

What Mario Draghi and the ECB unfurled Thursday was so unconventional and several standard deviations from what central banks have done over the last eight years, that the markets are still adjusting to it 24 hours after the announcement.

The lowering of rates to zero is a move the market can swallow easily, negative interest rates on the member banks’ cash at the ECB, ok we can see that as a way to put money to work. Raising QE to 80 billion euros a month, yup been there done that.

Now here is where it gets difficult for markets to discern. The central bank will loan to members at zero and then pay the banks a stipend to lend that money out to companies.

And if that’s not enough, the ECB will also be able to buy corporate bonds of European companies.

Now that last move puts European manufactures in the driver’s seat (pun intended) as far as cost of capital versus the rest of the world.

Mercedes-Benz and BMW cars will be cheaper to make when your lending rate is near zero on a bond offering or a credit facility with a bank.

It’s full-bore socialistic economics, which is why markets are trading all over the map on Thursday and Friday.

 

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