September 18, 2014 / 9:39 AM / in 3 years

Low take-up for cheap bank credit raises pressure on ECB

FRANKFURT (Reuters) - The European Central Bank saw far less demand than expected on Thursday for its new four-year loans to banks, raising doubts about a stimulus package it hopes will stave off deflation and revive the euro zone economy.

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

That was well below the 133 billion euros forecast by a Reuters poll of 20 money market traders. Banks will get a second chance on Dec. 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 200 billion 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 400 billion 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.

But ECB Executive Board member Peter Praet warned against reading too much into the first result, stressing that it was part of a broader policy package that “will have a sizeable impact” on the ECB’s balance sheet.

He added that expectations for the first round had always been lower than for the second offering in December.

“Markets have understood that the June and September measures should be seen as a combination aiming at addressing credit impairment,” Praet told Reuters in an interview, adding the measures could only be assessed once fully implemented.

Praet also reiterated the ECB’s readiness to do more should it become necessary.

QE EXPECTATIONS RISE

The success of the so-called TLTRO cheap credit project is important for the euro zone, 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 fell briefly, but rebounded later, while German bond yields nudged down and European shares climbed as bets on possible large-scale asset purchases gained traction.

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 Thursday’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 program is aimed particularly at banks in the euro zone’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 23 billion euros or roughly 28 percent of Thursday’s tender, data compiled by Reuters showed.

UniCredit, Italy’s largest bank by assets, said it took 7.75 billion euros 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 4 billion euros of the cheap credit and expected to claim the rest of its 12.5 billion allotment in December. Troubled lender Monte dei Paschi di Siena took 3 billion.

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

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 program of securitized 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.

The ECB tendered the four-year loans to banks at a fixed rate of 0.15 percent, 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.

Banks may have been holding fire to find out more details, due in October, of the program to buy asset-backed securities and covered bonds. They may also choose to hold on to existing crisis loans from an earlier ECB program for longer.

The ECB flooded the market with cheap three-year loans at the height of the debt crisis in late 2011 and early 2012. They expire early next year and many banks are expected to use the new four-year loans to pay back such debt.

Figures on Friday showing how much of those crisis loans banks will repay next week and the result of next week’s main refinancing operation may give an indication of how much will be rolled over into the new operations.

($1 = 0.7765 euro)

Additional reporting Marius Zaharia, Aimee Donnellan and Emelia Sithole-Matarise in London, Valentina Za and Danilo Massoni in Milan; Editing by Catherine Evans and Paul Taylor

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