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Belgrade – Last week, the world economy was caught by news of a record drop in the Euribor, that is, the interest rate at which selected European banks lend money to each other.
Source: Tanjug
Photo: Depositphotos / jamdesign
The fall in the European Euribor interest rate in the negative zone, although it is more favorable for debtors in the short term, still means that something is very wrong with economic flows, and that the markets expect a fall in prices, that is, , deflation, announced the Center for European Policies.
That rate has been decreasing for several days and today it is between minus 0.3 and minus 0.5 percent, depending on the term of the loan.
This is a sign that the markets expect a drop in prices, that is, deflation, despite the policy of unprecedented issuance of fresh money that the European Central Bank (ECB) has implemented since the beginning of the crisis caused by coronavirus, said CEP associate Marko Obradovic, who is coordinator of the National Convention on the EU. which oversees Serbia’s accession negotiations to the EU in Chapters 4 and 9.
He explains that deflation often motivates market participants to delay buying in the expectation that the goods or services will be even cheaper.
Such behavior, he says, further affects the reduction in economic activity and investment, and then the reduction in employment, causing a spiral of negative effects on the economy.
The fall in European interest rates also affects the price of loans in Serbia.
The reduction of the Euribor generally has a positive effect on all debtors, especially if, as is the case with most debtors in Serbia, they have entered into credit agreements with banks in which the interest rate of the borrowed funds is expressed like the sum of bank margins and Euribor, Obradovic said.
The lower the margin or Euribor, the lower the interest paid by the debtor. When the Euribor “slides” into the negative zone, the interest paid by the borrower becomes even lower than the bank’s basic margin.
The direct consequence of the fall of the Euribor is that the majority of the debtors will pay lower monthly installments in the next period.
Obradović claims that, in theory, it is possible for the Euribor to fall so far that it is below the bank’s margin level, which means that the bank could pay someone every month for a loan.
The good side of reducing the value of the Euribor should be motivating new loans and investments that would not be profitable and economically justified at higher interest rates.
Therefore, those projects with lower expected benefits under conditions of lower interest rates, become economically possible.
Unfortunately, the reasons for delaying investment today are not caused by economic factors but by health factors that limit the business.
This is also the reason why the Euribor fell despite the ECB’s efforts to prevent this from happening: the market is heavily influenced by non-economic factors.
Obradović affirms that it is very likely that in the next period, the ECB will continue with the monetary expansion policy in order to stimulate economic activity in some way.
The negative price of money, therefore, although in the short term it seems to facilitate business and reduce the burden on debtors, it is not a desirable phenomenon but a consequence of the great problems facing the economies of Europe and the world. Obradović explains.
Furthermore, in the long run, the permanence of the Euribor in the negative zone would mean an extremely deep crisis with profound and devastating social consequences, he said.
However, there is hope that the economic crisis caused by the coronavirus will not last long and that the recovery of economic activity and investment in the euro zone and its trading partners will be strong and rapid, Obradović concluded.
By the way, the Euribor was introduced on January 1, 1999.
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