Draghi seen delivering USD1 trillion to banks in ECB offer

Mario Draghi, president of the European Central Bank

Mario Draghi’s newest stimulus tool will hand banks more than 700 billion euros (USD950 billion) of cheap funding, economists say. The European Central Bank (ECB) has identified lending 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 ECB president 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.”
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.
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.”
The TLTRO will run alongside the unprecedented stimulus measures that the ECB announced after its June 5 policy meeting, including a negative deposit rate and an extension of unlimited short-term liquidity until at least 2016. After the July gathering, Draghi reiterated his pledge that rates will stay at present levels for an extended period.
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.
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 yesterday 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 10 basis points, or 0.10 percentage point, to 3.77 percent at 9:06 a.m. London time, after climbing 28 basis points last week, the biggest weekly jump since September. MDT/Agencies