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ECB Will Offer Banks Funding to Spur Commercial Lending

Posted by Joseph Trevisani on Jul 14, 2014 1:53:00 PM

Mario Draghi and his colleagues want European banks to use the billions of euros they have sitting idle at the central bank to promote economic growth.

Last month they tried the stick, instituting negative interest rates, by charging banks for keeping excess funds on deposit at the central bank.

Now there are set to proffer the carrot by handing banks more than 700 billion euros ($950 billion) of cheap funding, according to economists.

The ECB's targeted lending program for banks, the so-called TLTRO program, announced in June along with other measures, will offer banks access to as much a four years of low cost funding if they lend to funds to businesses aand households in the real economy.

Mr. Draghi has said the so-called TLTRO program could provide as much as 1 trillion euros to the eurozone economy.

A low and declining level of bank lending to businesses and households is one of the problems identified by the ECB contributing to the weak and faltering EMU recovery. 

A report from the ECB last month showed that lending to the private sector shrank again in May, contracting by 2 percent from a year earlier. Loan growth has been shrinking since March 2012.

Lenders could take up to 305 billion euros this year, according to the median estimate in a Bloomberg survey of economists, and up to 710 billion euros in 2015 and 2016. The loans will be charged just above the ECB main-refinance rate currently at 0.15 percent, a historical low. 

The problem for the ECB, as the Federal Reserve has discovered, is that lowering the cost of loans to business and households does not, in itself create demand. Lending is just the other side of borrowing. If there is limited demand for loans, then lowering the cost of borrowing does little to spur loan consumption. At best it improves the marginal cost for a certain small number of projects that may become profitable at the lower loan expense.

With interest rates already close to zero n the eurozone, loan demand is largely determined by the level of general business and consumer activity.

In that respect European economies have been moving backward.  Eurozone GDP in the first quarter dropped to 0.2 percent quarter on quarter, down from 0.3 percent in the prior three months.

Since the end of the recession in April last year, the second since the financial crisis, the EMU has averged just 0.225 percent GDP growth per quarter. In the four quarters after the end of the 2008-2009 recessions the euro zone expanded more than twice as fast at 0.55 percent per quarter.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg



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