Draghi Loan Plan Missing Estimates Hampers ECB Stimulus

By Stefan Riecher  

Photographer: Martin Leissl/Bloomberg

ECB President Mario Draghi has warned of a deflationary spiral of falling prices and... Read More

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• ECB Seen to Boost Purchases as Loans Fall Short

Mario Draghi has a way to go to meet his stimulus goal after banks borrowed less than estimated in the European Central Bank’s first targeted-loan offering.
The Frankfurt-based ECB lent 82.6 billion euros ($106.5 billion) to euro-area banks at a fixed interest rate of 0.15 percent in its targeted longer-term refinancing operations today. That was below all predictions in a Bloomberg survey, which gave a range of 100 billion euros to 300 billion euros.
The lending program is part of a range of measures to stave off deflation in the euro area that ECB President Draghi says will boost the
institution’s balance sheet to as much as 3 trillion euros from 2 trillion euros. If it fails, policy makers may need to resort to large-scale quantitative easing.
“It’s a disappointment for the ECB,” said Holger Schmieding, chief economist at Berenberg Bank in London. “This makes it more difficult for the ECB to meet its grand claims about the balance sheet. Liquidity does not seem to be the issue at the moment in the euro area.”

The ECB's Options to Aid the Economy

The ECB said 255 counterparties received the four-year loans. The central bank intends to spur lending to the real economy by tying the cheap cash to the size of loan books.
Spanish and Italian government bonds rose on speculation policy makers are closer to implementing sovereign-debt purchases. The euro was little changed at $1.2876 at 12:28 p.m. Frankfurt time. The benchmark Bloomberg Europe Banks and Financial Services Index was up 1.2 percent.

France, Spain

Societe Generale SA, France’s second-largest bank, participated in the operation, according to an e-mailed statement from a spokeswoman. The bank didn’t say how much it borrowed.
Spain’s Bankia SA borrowed 2.7 billion euros, a spokeswoman said by telephone today, asking not to be named in line with the lender’s policy. Banco Popular Espanol SA said yesterday that it would seek to borrow 2.85 billion euros. Greece’s four biggest banks planned to take as much as 5.4 billion euros, according to people with direct knowledge of the plans.
The ECB will conduct eight TLTROs through 2016, with the next one scheduled for December, and plans to release details of a program to buy asset-backed securities and covered bonds next month.
Banks may prefer to wait for the end of the ECB’s health check of bank balance sheets. The results of the Comprehensive Assessment will be published next month shortly before the central bank becomes euro-area supervisor.

Balance-Sheet Effect

“The completion of the bank assessment might be much more important,” Schmieding said. “There’s a chance that there’s a bigger turnout in December, if the banks see demand for credit picking up.”
Banco Sabadell SA, Spain’s fifth-biggest bank, didn’t bid for funds and will seek to borrow 5 billion euros in December, according to a person familiar with the information.
ECB Vice President Vitor Constancio said today that the total take-up of the TLTROs will be “significant” and will lead the balance-sheet expansion.
“Within the whole package of measures that we have taken, in terms of the effect they can have on our monetary base, the bulk will come from the targeted longer-term refinancing operations,” he told Bloomberg News in Cairns, Australia. Finance ministers and central bankers from the Group of 20 major industrial and emerging economies will meet in the city this week.

Economic Divergence

Inflation in the 18-nation euro area was 0.4 percent in August, holding at the weakest pace since 2009 and a fraction of the ECB’s goal of just under 2 percent. Draghi has warned of a deflationary spiral of falling prices and households postponing spending.
His liquidity drive highlights how the world’s biggest economies are diverging. The People’s Bank of China is injecting 500 billion yuan ($81 billion) into the nation’s largest banks to address weakening growth, according to a government official familiar with the matter. Bank of Japan Governor Haruhiko Kuroda said this month that he’ll do what’s needed to achieve his inflation goal.
In contrast, the U.S. Federal Reserve yesterday tapered its monthly bond buying to $15 billion in its seventh consecutive $10 billion cut, staying on course to end the program in October as the economy recovers. The Fed’s balance sheet is at $4.4 trillion. In the U.K., two of the Bank of England’s nine policy makers have called for a rise in the key interest rate.

‘Clearly Failed’

The ECB’s liquidity additions will be reduced by the repayment of three-year loans that were offered at the end of 2011, as a credit crunch in the region loomed. Almost 350 billion euros of those loans are still outstanding and must be repaid by early next year.
The ultimate value of the TLTROs and programs to buy covered bonds and asset-backed securities will be 985 billion euros, according to the Bloomberg survey. That leaves the three stimulus measures adding a net total of about 635 billion euros.
Draghi has left open the option of large-scale sovereign-bond purchases to achieve his balance-sheet target. The policy would risk splitting the 24-member Governing Council. Germany’s Jens Weidmann has spoken out against quantitative easing and opposed the rate cuts and asset-purchase programs this month.
“This was clearly a failed operation,” said Alexander Wojt, an analyst at Nordea Markets in Stockholm. “It puts pressure on them to also succeed with their covered-bond and ABS programs. Ultimately, even if you include those, it will be difficult for them to reach the balance-sheet target they have.”