Tuesday October 21, 2014 Search
Weather | Athens
24o C
11o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Draghi’s 1-trillion-euro shot at bank lending risks falling short

Jana Randow & Alessandro Speciale

Mario Draghi’s plan to end the euro area’s lending drought risks missing the target.

While the European Central Bank president says a program to hand as much as 1 trillion euros ($1.4 trillion) to banks has built-in incentives to spur lending to the real economy, analysts from Barclays Plc to Commerzbank AG have doubts on how well it will work. In fact, the measure allows banks to borrow cheaply from the ECB even without increasing credit supply.

Draghi has identified weak lending as an obstacle to the euro area’s recovery and is committed to reversing a slump that has eroded more than 600 billion euros in loans to companies and households since 2009. The risk is that if the latest plan fails, the currency bloc slips closer to deflation and to the need for more radical action such as quantitative easing.

“It’s not the silver bullet,” said Philippe Gudin, chief European economist at Barclays in Paris. “Every incentive for banks to lend is a good thing, but I wouldn’t say I’m reassured that credit will pick up.”

The ECB’s latest plan differs from its previous liquidity measures in the way it tries to nudge banks into lending more to the real economy. In contrast, three-year loans issued in late 2011 and early 2012 were used largely to buy higher-yielding government bonds, a practice known as the carry trade.

Attractive Option

Targeted longer-term refinancing operations will offer banks an initial total of as much as 400 billion euros this year that they can hold until 2016 with no strings attached. They can keep it another two years if they meet specific new lending targets set by the ECB, and they can borrow more funds starting in March if they exceed those thresholds. At his monthly press conference on July 3, Draghi said the total take-up could be 1 trillion euros.

“If this sounds a little complicated, I think you’re right,” he told reporters in Frankfurt. “But I’m confident that the banks will quickly understand that even though it’s complicated, it’s also quite attractive.”

Still, to keep the initial batch of funding for the full term, banks aren’t required to expand their loan books. They are only obliged to boost credit if they wish to borrow more cash starting next year, when the ECB will provide as much as 3 euros for every 1 euro of net new lending.

Bank Review

That’s a hindrance while the euro area’s subdued recovery keeps credit demand by companies weak, according to Marco Valli, chief euro-area economist at UniCredit SpA in Milan.

“It is unlikely that companies that had no intention of investing will start to do so now,” he said. “It isn’t clear that banks in peripheral countries where private sector debt needs to be reduced further will be capable of returning to flat or positive net lending in about a year. This could restrain the impact of this facility.”

The attitude of banks toward the TLTROs may become clearer after the ECB finishes its health check of their balance sheets. The asset quality review and stress tests are designed to strengthen the banking system by identifying any capital shortfalls before the ECB becomes the euro-area bank supervisor in November.

The final take-up of the TLTROs “could be significantly higher than the initial allowance of 400 billion euros,” said Christian Schulz, senior economist at Berenberg Bank in London. “That could provide a significant boost to lending after the completion of the asset quality review.”

Deflation Threat

The TLTRO program is the newest attempt by policy makers to strengthen a fragile recovery and avert the threat of deflation. Consumer prices rose an annual 0.5 percent last month, compared with the ECB’s goal of just under 2 percent.

Officials are also waiting to see the broader impact of the stimulus package they announced in June, which included an unprecedented negative deposit rate and a commitment to providing unlimited short-term liquidity for at least another two years.

“They have too high expectations” of the TLTRO, said Jan Von Gerich, a fixed-income analyst at Nordea Bank AB in Helsinki. “The program will support the euro-area economy but it falls short of what would be required to tackle low inflation. There’s scope for more aggressive measures.”

Carry Trade

That could eventually mean broad-based asset purchases, an option that Draghi has said is available should the outlook for inflation worsen. The ECB has already said it is intensifying preparations for a smaller program that could see it buy asset- backed securities.

For banks, the temptation at least until the euro-area revival is entrenched is to continue their practice of using funds borrowed cheaply from the ECB to invest in sovereign debt. While that prevents the money reaching the real economy directly, the Dutch central bank says it still has the benefit of reducing broad borrowing costs.

“Banks may increase lending but can also use the funding for purchases of other assets, such as corporate bonds, commercial paper and government paper, which will help bring down rates across the board,” the bank said on its website last month.

Debt markets are reflecting the possibility of more carry trades. Spanish two-year yields and Irish 10-year yields dropped to records last week. German one-year rates fell below zero for the first time since June 2013.

“The ECB is helping finance ministers in the periphery as much as it is helping borrowers, maybe even more,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. “The TLTROs are much less targeted than the name suggests. Of course, you could use the funds to boost credit supply, but you can also use them to buy government bonds.”

[Bloomberg]

ekathimerini.com , Monday Jul 7, 2014 (11:39)  
Tax debts to Greek state exceed 70 billion euros
Greek 2013 budget gap revised down to 1.8 pct/GDP
Greece said to seek tailor-made plan for bailout exit
Greek current account surplus widens in August
Inmate injured in Patra prison yard brawl
A 45-year-old Nigerian man was being treated at a hospital in the western port city of Patra on Tuesday after being stabbed in the leg during a brawl between a group of inmates in the exerci...
SDOE to probe Proton Bank loan to Thessaloniki businessman
A prosecutor in charge of investigating corruption claims in Thessaloniki, Argyris Dimopoulos, has ordered a preliminary probe a large loan issued by Proton Bank before the lender was split ...
Inside News
BASKETBALL
PAOK fans stop coach Markopoulos´s move to Olympiakos
Olympiakos is once again in the lookout for a new coach after the refusal of PAOK to release Soulis Markopoulos, while Panathinaikos defeated Kolossos on Rhodes on Monday to become the only ...
BASKETBALL
Reds lose to Nea Kifissia, search for new coach
Nea Kifissia recorded the biggest win of its short history in the top flight defeating Olympiakos 68-67 on Sunday, in a Basket League weekend marred by the abandonment of the Thessaloniki de...
Inside Sports
INTERVIEW
The past, present and future of the Greek debt crisis
For a decade, until mid-2012, Josef Ackermann was the CEO at Deutsche Bank. It was a position that earned him the nickname “shadow chancellor” of Germany and allowed him to play a decisive r...
COMMENTARY
Self-opposing coalition
Even though a number of polls see the total percentage of the two ruling parties trailing that of SYRIZA, New Democracy and PASOK are still in government and the leftists in opposition. This...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Tax debts to Greek state exceed 70 billion euros
2. Greek 2013 budget gap revised down to 1.8 pct/GDP
3. Greece said to seek tailor-made plan for bailout exit
4. Greek current account surplus widens in August
5. Inmate injured in Patra prison yard brawl
6. SDOE to probe Proton Bank loan to Thessaloniki businessman
more news
Today
This Week
1. The past, present and future of the Greek debt crisis
2. Gang importing heroin into Greece busted
3. Self-opposing coalition
4. Gutsy rectors
5. Applications for heating oil subsidy set to start
6. SDOE to probe Proton Bank loan to Thessaloniki businessman
Today
This Week
1. Possible third figure in Amphipolis mosaic may be uncovered shortly
2. Greece to contribute 1 mln towards Gaza reconstruction
3. Greece nearing bailout exit, says gov't spokesperson after IMF talks
4. Istanbul skyscraper casts shadow over Greece's banking ambitions
5. Coalition shooting itself in the foot
6. GPO poll gives SYRIZA clear lead over New Democracy
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.