The European Central Bank is about to find out how attractive its offer to pay lenders to lend really is.
Starting tomorrow, euro-area banks can bid for a four-year loan from the ECB at an interest rate that begins at zero and could ultimately be negative. The net take-up, after institutions repay their borrowings from an earlier and less-generous programme, is likely to be €50bn ($57bn), according to a Bloomberg survey of economists. The result of the operation, the first of four, will be published on Friday.
The largess of the targeted lending programme, known as TLTRO-II, is part of the ECB’s drive to persuade banks to provide more credit to companies and households, spurring economic growth and reviving inflation. Even so, with the currency bloc already awash in liquidity and the global outlook uncertain, the impact might be incremental rather than spectacular.
“We don’t think the programme is going to be a game changer in terms of lending conditions and loan growth,” said Nick Kounis, head of macro research at ABN Amro Bank in Amsterdam, who predicts the net take-up in all four operations of the programme will be between €100bn and €200bn. “It is a good idea, but we don’t expect this to lead to a boom in lending.”
The quarterly TLTRO-II operations will be initially charged at the main refinancing rate, currently zero. That can fall as low as the deposit rate, now minus 0.4%, if banks expand their eligible loan book by 2.5% by the end of January 2018.
ECB President Mario Draghi has expressed confidence that the plan — announced in March as part of a wider stimulus package — will underpin the region’s fragile recovery. Its predecessor TLTRO-I has so far provided banks with a total of €426bn at low but non-zero interest rates and was, in Draghi’s words, a “pretty successful experience.”
Under an early-repayment option, banks will give back €368bn of that cash on June 29. They’ll fund that, and take more on top, by borrowing about €420bn in the first TLTRO-II operation, the Bloomberg survey shows. A final TLTRO-I on June 23 will be carried out as scheduled, with the take-up likely to be minimal.
One reason to borrow a large sum of cash now might be timing - the operation coincides with the UK’s June 23 vote on its European Union membership. A decision to leave the EU could send shock waves through markets and dry up British banks’ access to euros. Those lenders are eligible if they have operations in the currency bloc.
With two days to go before the referendum, separate opinion polls show leads for both the “Leave” and “Remain” campaigns and billionaire investor George Soros warned of a slump in the pound should voters back a so-called Brexit.
“One factor that could boost demand at the June TLTRO-II is Brexit fears,” Luca Cazzulani, a senior fixed-income strategist at UniCredit in Milan, wrote in a client note. “Banks will have to submit their bids the day before the referendum and this could support precautionary demand to refinance expiring debt.”
Yet if there’s one thing the euro area isn’t short of, it’s liquidity. In part because of the ECB’s asset-purchase programmes, excess liquidity in the 19-nation bloc reached an all-time high last week of €868bn. In the case of a Brexit, euros can be sent to Britain via a swap line with the Bank of England.
At the same time, demand for credit is hardly booming, as noted by Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands, who predicts a net take-up of €40bn this week.
“TLTRO-II will not be a major success, largely because there is likely to be fairly limited demand for these loans in the face of huge excess liquidity in money markets and still relatively subdued loan demand,” he said. “Although we do believe that this is actually the best and most effective part of the ECB’s March easing package, as it does have a clear connection with the real economy.”