You would expect Eurozone banks to be lining up to take advantage of the ECB cheap loans which were offered today. The currency bloc’s central bank issued cheap, four-year loans, but generated very little interest, surprising everybody.
The poor uptake raises pressure on the European Central Bank (ECB) to seek out other ways of preventing the Eurozone from sliding into a spiral of deflationary recession.
The “targeted longer-term refinancing operations”, i.e. the cheap loans, had been announced by the ECB in June as part of a package of measures, which included slashing interest rates, to kick-start the economy.
The Wall Street Journal quoted Martin van Vlet, an ING analyst, who said “The takeup in the first TLTRO is disappointing and will raise further doubts about the feasibility of the ECB’s intention to increase its balance sheet by around €1 trillion.”
According to the ECB, Eurozone banks borrowed a total of €82.6 billion ($106.9 billion) in cheap, 4-year loans from its new facility. For this measure to be seen as a success, analysts say the total borrowed needs to be at least $100 billion.
Italian and Spanish banks took more than 45% of the €82.6 billion. Italy’s largest bank, UniCredit SpA, said it raised €7.8 billion, Intesa Sanpaolo SpA (2nd largest in Italy) took €4 billion. Spain’s largest bank, Santander, took €3.6 billion. German and French bank did not disclose what their borrowing was.
Next allotment in December
The ECB allotted funds to 255 counterparties at 0.15%, which is 0.10 of a percentage point above its main refinancing rate. Another four-year loan will be announced on December 9 and allocated on December 11.
The ECB is now under greater pressure to take further measures to boost Eurozone GDP.
The ECB wrote, “In the first two tenders, banks and groups of banks are entitled to an initial borrowing allowance equal to 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. Therefore, eligible banks who have not reached their initial allowance limit in the first TLTRO will be able to increase their initial borrowing amount up to that limit in the second TLTRO.”
“Thereafter, banks will be able to apply for additional funding, depending on the evolution of their lending activities against a specific benchmark.”
August’s annual inflation was 0.4% in the Eurozone, way below the ECB’s target of 2%.
Most analysts in Europe and North America believe the central bank will not draw any conclusion from today’s result. Several banks are likely waiting for the ECB’s assessment of banks’ health, which will be released in the second half of next month, before deciding whether to take advantage of the cheap, 4-year loans.
The ECB meets on October 2, when it will announce details of its private-asset purchase program. Banks may be waiting to see what those details include.
