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Monday, July 14, 2014
Mario Draghi Seen Handing $1 Trillion to Banks in ECB Offer
Draghi Seen Handing $1 Trillion to Banks in ECB Offer
By Alessandro Speciale and Andre TartarJul 14, 2014 2:51 PM ET
July 11 (Bloomberg) –- In an exclusive interview, ECB Governing Council
Member Ewald Nowotny discusses whether the Euro is just too strong and
if the ECB could do more. He speaks to Jonathan Ferro on Bloomberg
Television’s “Countdown.” (Source: 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.
“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.”
Photographer: Ralph Orlowski/Bloomberg
Mario Draghi, president of the European Central Bank.
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.”
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