Low take-up for cheap bank credit puts ECB under severe pressure

 The headquarters of the European Central Bank in Frankfurt. The ECB saw far less demand than expected yesterday for its new loans to banks, raising doubts about a stimulus package it hopes will stave off deflation and revive the eurozone economy.

Reuters/Frankfurt

The European Central Bank saw far less demand than expected yesterday for its new four-year loans to banks, raising doubts about a stimulus package it hopes will stave off deflation and revive the eurozone economy.

The launch of the scheme, a central plank of the ECB’s efforts to coax reluctant banks to lend, saw the eurozone’s central bank hand out €82.6bn of €400bn ($515.16bn) on offer to 255 banks.

That was well below the €133bn forecast by a Reuters poll of 20 money market traders. Banks will get a second chance on December 11 to apply for the cash – granted at ultra-low interest rates on condition they lend it on to businesses – when the poll predicted take-up of 200bn euros.

Berenberg Bank chief economist Holger Schmieding called the low demand “a disappointing result for the ECB” that cast doubt on the bank’s hopes of injecting 400bn euros into the economy through this scheme.

“Simply offering more liquidity at more generous terms to banks awash in cash will not make a huge difference to the outlook for growth and inflation,” he said.

The key problems were weak demand for credit in the eurozone, exacerbated by economic conflict with Russia over Ukraine and uncertainty in the banking sector ahead of the publication next month of an ECB health check on major banks.

The success of the so-called TLTRO cheap credit project is important for the eurozone, whose 18 countries are grappling with record-high unemployment and fading economic growth.

Previous rounds of cheap ECB loans for banks and borrowing costs close to zero have done little to boost lending to companies, with much of the money instead spent on government bonds. Critics fear a similar fate for the new scheme.

Market reaction was muted. The euro rose briefly against the dollar, while benchmark German government bond futures dipped. Traders said the low take-up raised expectations the ECB may eventually take more radical monetary stimulus measures, such as printing money to buy securities – quantitative easing, or QE – although there is strong resistance in Germany to such a move.

Some banks were reluctant to participate in yesterday’s round, possibly for fear that it could single them out as struggling just weeks before the results of an ECB-led asset quality review (AQR) and stress tests.

“The European financial sector continues to be weak,” said Karel Lannoo of Brussels think tank the Centre for European Policy Studies. “There may be a stigma because the markets are waiting for the AQR in a few weeks.”

The TLTRO programme is aimed particularly at banks in the eurozone’s periphery, where credit is scarce and borrowing costs far higher than in core northern economies following a debt crisis in which five countries required EU/IMF bailouts and heavily indebted Italy came near the brink.

Ten Italian banks took a combined €23bn or roughly 28% of yesterday’s tender, data compiled by Reuters showed.

UniCredit, Italy’s largest bank by assets, said it took €7.75bn of the new funds, the maximum allotted to it in Italy, but did not draw funds in Austria and Germany, where it has subsidiaries.

Intesa Sanpaolo, the country’s biggest retail bank, said it took €4bn of the cheap credit and expected to claim the rest of its €12.3bn allotment in December. Troubled lender Monte dei Paschi di Siena took €3bn.

Spain’s BBVA, Bankia, Banco Popular and Caixabank took a total €11.1bn between them. Spanish banks are expected to borrow more than €35bn at the two auctions, according to Reuters data.

Economists said the low take-up would put more pressure on other stimulus measures announced by ECB President Mario Draghi this month, including plans to buy asset-backed securities and covered bonds, to expand the central bank’s balance sheet.

“It ... raises expectations for the purchase programme of securitised debt and it could fuel speculation that the ECB may have to buy other assets on top, such as government bonds,” said Johannes Mayr, an economist with BayernLB.

Draghi has also urged eurozone governments with fiscal room to increase investment spending and others to implement structural reforms to revive anaemic growth.

The ECB tendered the four-year loans to banks at a fixed rate of 0.15%, a slight premium to the regular price of funding. If banks start lending more to the “real economy”, they can take further cheap ECB loans running through to mid-2016.