September 19, 2014
This morning’s news are most definitely outside our reservation, which leaves us free to focus on the disappointing take-up rate for the TLTRO. What happened yesterday was hugely important because it shifts the balance in the ECB’s policy tools firmly towards asset purchases. TLTRO is still an element of the ECB’s arsenal, but only one element, and not the main one either.
Even the final take-up number of €82.6bn was inflated as banks had earlier come under some gentle pressure to take the money. Reuters had previously run a poll of money market traders, with an average expectation of €133bn.
The fundamental point is that whatever causes the credit crunch in large parts of the eurozone is no longer fundamentally a question about constrained supply. It is demand-driven. Now obviously demand is affected by prices. Who in their right mind would demand a loan with interest rates of 10% at this point? Demand and supply are, of course, intertwined. The point is that fixing the supply side is clearly not sufficient. The same goes for the AQR/bank stress test. They are important, but their immediate direct impact on lending is not going to be massive.
Reuters has more details. Ten Italian banks took 28%, including Unicredit, which took €7.75bn. The not quite surprising consensus among the various economists sampled by Reuters was that the low take-up rate would raise the pressure for further monetary policy action, including of course, QE.
Greek banks drew some €5bn, according to Kathimerini, some 6.2%. The participation of Greece’s four systemic banks in Thursday’s auction is seen as satisfactory given that this was the first in a series of eight to be completed in the first half of 2015. The banks have already covered half of the maximum of €10bn they can borrow from the ECB under the programme.
Richard Barley noted in the Wall Street Journal that the take-up rate represented only a fifth of the €400bn the ECB wanted to raise in the two TLTRO operations this year. The next one is due in December. He noted that the low take up rate would make it more difficult for the ECB to increase its balance sheet by the desired €700bn-1000bn.
Daniel Gros, Cinzia Alcidi and Alessandro Giovannini at CEPS have a draft paper on the TLTRO and came to the following conclusion:
“The basic reason for this scepticism is that lending to the real economy is no longer constrained by supply problems (such as insufficient capital or high cost of refinancing) but weakness in the real sector itself. The TLTRO in particular has been designed to provide liquidity to increase the supply of credit to the economy, but the underlying assumption might be mistaken. Moreover, experience suggests that it is difficult to target the use of central bank funding as money is inherently fungible and can take forms other than outright lending.”
In other ECB-related news, the details of the rotation system were announced. It is a change from what we had heard in June. Jens Weidmann, for example, will not be voting in May and October of 2015. Under the new rules one five large countries rotate around four votes, while all the remaining countries, currently 14, have 11 votes. Their votes will get diluted as the eurozone expands.
We also have reports on the threat by Spanish socialists to vote against the Juncker commission for being too austere; on the end of the Greek programe, on Ireland’s recovery, on Austria’s lack of a recovery, on Hollande’s plan for a recovery, and on rising opposition in Italy to Renzi’s reforms.