Mario Draghi is about to get an idea of how far reality falls short of his intentions.
A round of long-term loans by the European Central Bank to lenders this week won’t even cover the repayments they owe from a previous program, according to a Bloomberg News survey of analysts. The operation could show that stimulus measures the ECB president says are “intended” to add as much as 1 trillion euros ($1.23 trillion) to the financial system won’t suffice without large-scale buying of assets such as government bonds.
Draghi has promised the ECB will act should current stimulus prove insufficient when it is reassessed early next year, and the central bank is said to be preparing a QE package to be discussed at the next monetary policy meeting on Jan. 22. The debate is dividing officials though, meaning each fresh piece of evidence could prove critical in swaying opinion.
“The ECB’s policy decisions will be strongly informed by the take-up of the targeted longer-term refinancing operations and old longer-term refinancing operations paydown,” said Huw van Steenis, an analyst at Morgan Stanley in London. A disappointing TLTRO “is likely to bring to the fore weak demand dynamics in the euro zone for policymakers and intensify the case for more stimulus,” he said.
Predictions ranged from 90 billion euros to as much as 250 billion euros, with a median estimate of 148 billion euros, in the survey of 24 analysts. The funds under the TLTRO, which is designed to spur lending to the real economy, will be allotted on Dec. 11. An initial round of the program in September raised 82.6 billion euros, less than economists forecast.
Between now and February, banks must repay 270 billion euros of outstanding loans issued at the end of 2011 to alleviate the effects of the euro area’s sovereign debt crisis.
“A low figure, say below 150 billion euros, would make the prospect of actual sovereign-bond QE in early 2015 look even more probable,” said James Knightley, senior economist at ING Bank NV in London.
Draghi’s plan to boost the ECB’s balance sheet toward early-2012 levels, when it was about 3 trillion euros compared with 2 trillion euros now, is aimed at ensuring the euro area is flooded with cash, keeping real interest rates low and spurring credit creation that can revive the economy. As well as the long-term loans, it’s also fueled by purchases of covered bonds and asset-backed securities.
Since those private-sector asset purchases started in late October, the balance sheet has barely budged as liquidity injections are countered by repayments on the older loans. Covered-bond purchases totaled 17.8 billion euros as of Nov. 28 and buying of ABS, which started late last month, reached 368 million euros. The latest figures for those programs will be published at about 3:45 p.m. in Frankfurt today.
The 18-nation economy has also shown little sign of improvement. Inflation matched a five-year low at 0.3 percent in November and the ECB last week cut its forecasts for consumer prices and gross domestic product through 2016.
ECB Governing Council member Ewald Nowotny said in Frankfurt today that there is a “high probability” inflation will slow further next quarter because of a slump in energy prices. Oil plunged after the Organization of Petroleum Exporting Countries decided not to ease a supply glut.
While Draghi told reporters on Dec. 4 that ECB officials discussed all assets except gold for any QE program, Nowotny said those comments were “a bit widely formulated.” Policy makers are “thinking specifically about government bonds,” he said.
Some officials favor a government-bond purchase program exceeding 1 trillion euros, Frankfurter Allgemeine Zeitung reported on Dec. 5, citing a person familiar with the matter.
The QE package that will be prepared for the January meeting is envisaged as including sovereign debt, said two euro- area central-bank officials familiar with the deliberations. No decision on implementing QE has been taken and the composition of the program may be influenced by incoming data, they said, asking not to be identified because the discussion was private. An ECB spokesman declined to comment.
If that is to convince skeptics within the Governing Council, current stimulus may have to be clearly seen to be failing. Executive Board member Sabine Lautenschlaeger and Bundesbank President Jens Weidmann have both spoken out against sovereign-bond purchases, saying it undermines the incentive for governments to make structural adjustments and would have to overcome high legal hurdles. The ECB is banned from monetary financing of governments by European Union law.
Draghi’s battle was highlighted at last week’s Governing Council meeting when at least three members — Yves Mersch, Lautenschlaeger and Weidmann — opposed his use of the word “intended” in describing the balance-sheet strategy. The wording the previous month, which was unanimously agreed, was “expected.” Draghi told reporters after the meeting that while a QE program can be designed to have a consensus, “we don’t need unanimity.”
“The bottom line is that the ECB has yet to achieve a comfortable enough majority in favor of sovereign QE,” said Frederik Ducrozet, a Paris-based economist at Credit Agricole, who forecasts banks will take about 220 billion euros in the TLTRO. “Future decisions will be even more dependent on the data than we suspected.”