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Draghi Seen Handing $1 Trillion to Banks in ECB Offer

July 14, 2014

Draghi Seen Delivering $1 Trillion to Banks in ECB Offer

Mario Draghi, president of the European Central Bank. Photographer: Ralph Orlowski/Bloomberg

Mario Draghi’s newest stimulus tool will hand banks more than 700 billion euros ($950 billion) of cheap funding, economists say.

The European Central Bank president’s targeted lending program for banks will boost credit for the real economy as planned, and at the same time help keep the financial system flush with cash, according to the Bloomberg Monthly Survey of 45 economists. Draghi highlighted the measure in testimony to lawmakers today in Strasbourg, saying that it has “strong incentives” built in to spur lending.

The ECB has identified loans to companies and households as a key weakness in the euro area’s fragile recovery. The so-called TLTRO program, part of a wider package of measures announced in June, offers as much as four years of low-cost funding tied to bank lending that Draghi said this month could ultimately provide as much as 1 trillion euros.

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“The take-up should be large -- the money is cheap and banks should feel no stigma about accepting a free lunch,” said Alan McQuaid, chief economist at Merrion Capital in Dublin, who predicts banks will take the maximum available. “With any luck, Draghi’s next problem will not come until 2018, when 1 trillion euros needs refinancing.”

‘Strong Incentive’

The Trouble With Falling Prices

Lenders probably won’t take the full amount, the survey shows. They’ll borrow 305 billion euros in the first TLTRO rounds this year, compared with an ECB cap of about 400 billion euros, according to the median estimate of economists. That’ll rise to 710 billion euros after quarterly operations in 2015 and 2016 tied to new loans, the survey shows.

The measure “should ease their financing costs, allowing banks to pass on such attractive conditions to their customers,” Draghi told lawmakers today as he testified to the European Parliament for the first time since elections in May. “Moreover, the growth of our balance sheet as a result of a significant take-up in our TLTROs will put downward pressure on interest rates in the money markets.”

Three-quarters of respondents said the measure will increase credit provision to companies and households in the euro-area periphery. The loans are charged just above the ECB’s benchmark interest rate, currently at a record-low 0.15 percent.

“On the one hand, the program provides a strong incentive to expand lending, especially for banks with higher funding costs,” said Kristian Toedtmann, senior economist at Dekabank in Frankfurt. “On the other hand, there are other impediments to lending, such as a lack of capital or macroeconomic risks. But in total, the program should contribute to a pickup.”

‘Extended Period’

The TLTRO will run alongside the unprecedented stimulus measures that the ECB announced after its June 5 policy meeting. That package included a negative deposit rate, and an extension of unlimited short-term liquidity that will last until at least 2016. After the July gathering, Draghi reiterated his pledge that rates will stay at present levels for an extended period.

In the survey, 86 percent of economists said Draghi’s comments strengthened his forward guidance on rates. The proportion forecasting the ECB will start increasing official rates next year dropped to 13 percent from 31 percent in last month’s survey. The share saying rates will rise in 2017 or later more than doubled to 42 percent.

“We believe that the ECB has been increasingly successful in cementing expectations that rates will stay low well into 2016,” said Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands.

ABS Program

The survey also showed economists predict ECB preparations to buy asset-backed securities will take longer than previously thought. The program could add liquidity to the market and bolster the market for securitization, offering companies an alternative to bank financing.

About 44 percent of respondents expect the ECB to start an ABS-purchase program by the fourth quarter of this year, down from 52 percent in last month’s survey.

ECB Governing Council member Ewald Nowotny said last week that while the central bank is willing to buy ABS if the technical and economic conditions are right, it should agree on a program by the end of the year or be prepared to drop it.

“If we’re not able to come up with some kind of plan this year, the conclusion should be that, unfortunately, it is too difficult for Europe, given the material differences, and that it would make no sense,” he said in an interview in London. “This is in Europe much more difficult than in the U.S. and the U.K. because of strong divergences, not least on the legal side.”

Asset Purchases

Economists remain split on the need for broad-based purchases of assets including government bonds. Just over 50 percent said the ECB won’t implement QE at all, little changed from the last survey. Fifteen percent said the measure will be implemented before the end of the year.

Draghi has said large-scale asset purchases could be used if the medium-term outlook for inflation worsens. Nowotny said QE is “is not the really relevant discussion we have now.”

Even so, euro-area inflation has held below 1 percent for the past nine months, less than half the ECB’s goal, and was at 0.5 percent in June. A composite index of services and manufacturing activity last month compiled by Markit Economics slid to the lowest level this year. Euro-area industrial production declined 1.1 percent in May from April, the European Union’s statistics office in Luxembourg said today.

IMF’s View

Over the medium term, the euro-area economy faces “a risk of stagnation, which could result from persistently depressed domestic demand due to deleveraging, insufficient policy action, and stalled structural reforms,” the International Monetary Fund said today. “If inflation remains too low, consideration could be given to a large-scale asset-purchase program, primarily of sovereign assets.”

Concern that the region’s recovery could falter and that it remains vulnerable to financial shocks have been compounded after a member of the Portuguese banking group that includes Banco Espirito Santo SA, the nation’s second-largest lender, missed payment on short-term debt. That roiled global markets and sent yields on 10-year Portuguese bonds to the highest level since May 21.

Portuguese government debt advanced for a second day today as investor concern diminished that missed payments by a Portuguese bank would fuel a new banking crisis in the euro area’s most indebted nations. The country’s 10-year yield fell six basis points, or 0.06 percentage point, to 3.81 percent at the close in London, after climbing 28 basis points last week, the biggest weekly jump since September.

Just 14 percent of economists in the Bloomberg survey said the euro area’s economic situation will improve in the next four weeks, down from 35 percent a month ago. Three-quarters of respondents said the outlook will remain the same.

“The perception of the euro zone’s current state has weakened considerably,” said Christopher Matthies, an economist at Sparkasse Suedholstein in Neumuenster, Germany. “There is increasing uncertainty about the strength of the recovery taking place.”

To contact the reporters on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net; Andre Tartar in London at atartar@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Joshua Robinson at jrobinson37@bloomberg.net


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