Wednesday, July 09 12:52:02
The ECB is hoping a new round of long-term loans will be used by banks to drive down borrowing costs - a substitute for an asset-purchase scheme of its own which would avert a potentially damaging internal split.
The ECB unveiled the loans plan last month as part of a package of measures to breathe life into a sluggish euro zone economy, where inflation is running far below the central bank's target and there is a dearth of credit to smaller firms.
Presented as a means to foster bank lending to businesses, the scheme is in fact a hybrid programme that also offers banks access to cheap funding for four years with which they can buy financial assets.
Policymakers hope that in the round it will create a "credit multiplier" effect, tantamount to enabling the private sector to embark on quantitative easing (QE) - creating money to buy assets to keep borrowing costs low and boost spending - on the ECB's behalf.
"It's loans but not only loans," ECB Executive Board member Peter Praet said of the funding programme.
"It's also the liquidity injection, the funding substitution," he told Reuters in Paris on Wednesday.
The idea is that one or more of three things will happen:
Banks will use the money to lend to households and businesses, thereby directly helping to revive the economy; they take the money and buy assets themselves; they use the funds to substitute for issuing their own debt.
The latter two could lower the funding costs for all banks, even those who don't take the ECB's money, and spill over into looser conditions in the broader corporate credit market, hopefully making money cheaper and easier to access.
In a speech in Paris on Wednesday, Praet said the loans plan, or TLTRO, "has the potential to halt the vicious circle of constrained lending, weak macroeconomic conditions and elevated loan delinquencies, and re-ignite a positive 'credit multiplier' process".
Under the plan, banks can borrow up to 400 billion euros ($545 billion) in September and December at a slight premium to the ECB's regular funding operations. They have subsequent opportunities running through to mid-2016 to take additional loans.
Banks that have shown positive net lending between April of this year and the new funding operation can borrow up to three times their net new lending in that window and keep the money until 2018, so long as they continue to increase lending.
The terms of the plan do not stipulate, however, that banks must devote all the ECB loans to new lending, allowing the possibility of using some of the money for their own funding purposes or to buy assets.
"They are offering banks very cheap funding and asking the banks to expand their balance sheets, and in the process they will create money and they will buy assets," said RBS economist Richard Barwell.
"That will look an awful lot like what the ECB might have done themselves," he said. "But it won't be the ECB buying the assets, it will be the private sector buying the assets. So to me it looks a lot like arms-length QE."
Quantitative easing involves a central bank buying financial assets from banks and other private institutions with newly-created money, thereby increasing the amount of cash sloshing around an economy which should make it cheaper to borrow and easier to spend.
The money from the TLTROs (targeted longer-term refinancing operations) will eventually be repaid but it will expand the euro zone's money supply for four years.