The European Central Bank’s second tranche of three-year loans next week may mark the end of its “generous” provision of long-term funding, according to Deutsche Bank AG.
While markets are hoping for “a continuation of the program through the rest of the year,” another large long-term refinancing operation, or LTRO, after this one “seems unlikely,” London-based Deutsche Bank chief economist Thomas Mayer said in a note to clients today.
“We expect the more hawkish ECB council members, coming mainly from the AAA-rated countries, to oppose continuing generous LTROs on the grounds that these operations will reduce adjustment pressure on both governments and banks,” Mayer wrote. “Unless the euro crisis deteriorates significantly further,” Deutsche Bank expects the ECB “to wind down these operations” after the next three-year operation, he said.
The Frankfurt-based ECB will offer banks a second batch of three-year loans on Feb. 28 and award them on Feb. 29. It lends banks as much money as they ask for against eligible collateral. In the first three-year operation in December, the ECB provided a record 489 billion euros ($647 billion) to banks. It has also previously offered banks unlimited 12-month loans.
Deutsche Bank expects next week’s three-year allocation to be “about the same size” as the first one, Mayer said.