Monday, 27 August 2012

EU Banks and Investors Seek Low Risk Alternative Investments

In the last three years, the euro zone crisis has battered investors’ confidence. In that time we have seen Greece, Ireland, Portugal, Spain and Cyprus needing a bailout from the other euro zone countries (and the International Monetary Fund), in order to keep paying their sovereign debts; and covering their budget deficits.

The simple fact is that European banks would rather put the money that is given to them, back into the ECB for higher and safer returns, than to lend it to the businesses and consumers; who need it the most. Let's face it. All the previous rate cuts by the ECB achieved nothing meaningful, and as the euro zone finds itself embroiled in bailouts; it continues to experience weak growth. By the safe token, investors are shying away from traditional investments, in favour of alternative investments; that will strengthen their portfolio and incur less risk.

After numerous previous cuts, the ECB has now taken interest rates to historic lows. And yet, not only are the banks in the euro zone not lending to businesses or consumers, but they are not lending to each other; either.  This is simply because the interest rates given by the ECB, although extremely low, are more attractive and guaranteed; much like an investor's high interest account. Furthermore, banks see little reason to take on more debt, at this uncertain time.

Rather than opting for bailouts, the ECB must do more to stimulate the European banking sector. For example, the ECB could make it easier for banks to borrow from it, by accepting a wider range of collateral. The ECB must provide other alternatives, that will give relief to banks by lowering the amount they pay on their debts, instead of just cutting interest rates.

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