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ECB Loan Program Eclipsed by QE May Point to Credit Revival

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The European Central Bank will get more evidence on Thursday that lenders are stepping up their support of the euro area’s economic recovery.

At 11:15 a.m. in Frankfurt, the ECB will announce the results of the fourth round of its program for giving banks cheap funding based on their lending to companies and households. Financial institutions will probably take up 75 billion euros ($85 billion), according to the median of 22 estimates in a Bloomberg survey of analysts. Predictions ranged from 20 billion euros to 160 billion euros.

The Targeted Longer-Term Refinancing Operations were announced a year ago by ECB President Mario Draghi as part of a package to boost the economy and so revive inflation. While they had little initial impact and are now being dwarfed by quantitative easing, the TLTROs still provide a signal of banks readiness to back the regional upswing with new loans.

“Credit to the private sector is turning and will gradually recover in the coming months,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Measures to improve balance sheets have left banks in a better position to lend. In addition, we’re seeing a cyclical recovery, which leads to more demand for loans as companies see more opportunities to invest. Finally, bank loan rates have come down helped by QE.”

Bank Turnaround

Interest in the TLTRO program picked up in the last operation in March as banks started expanding lending again for the first time in almost three years. The take-up of 98 billion euros -- almost a third of which was by Italian lenders -- was more than twice as much as economists forecast. Banks have borrowed a total of 310 billion euros under the three operations that have been carried out so far.

While the terms of the early programs were different, TLTROs from now on are directly tied to the rate of growth of banks’ loan books. They can borrow as much as three times their net lending to companies and households, excluding mortgages, over a set period.

Since March, the ECB has offered the funds at the main refinancing rate of 0.05 percent, abolishing the premium of 10 basis points it charged in the first two rounds. The operations are quarterly, and all the loans mature in September 2018.

Even so, the euro area is now flooded with cash as the ECB spends 60 billion euros a month on asset purchases. Excess liquidity has jumped to 326 billion euros from as low as 71 billion euros in November. The overnight cost of interbank borrowing is minus 0.11 percent. The ECB’s deposit rate is minus 0.2 percent, meaning banks pay to hold surplus cash.

Fragile Credit

“The trend is for Spanish banks to continue seeking ECB funds because it’s cheap funding but they don’t need to ask for large amounts,” Nuria Alvarez, a bank analyst at Renta 4 Banco SA in Madrid, said by phone. “Credit is expanding but they don’t need more liquidity. It’s not worth it.”

Moreover, while banks may be healthier after strengthening their balance sheets for an ECB assessment last year, the euro area’s credit revival remains fragile. Loans to the private sector were unchanged in April after growing 0.1 percent in March, the first expansion since 2012.

“We remain cautious over the prospects of a credit-driven recovery in the euro area for this year, mainly due to still weak investment,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “While there is a clear improvement in lending, we don’t expect credit expansion to drive growth to the same extent as is the past.”

Greek Stress

The TLTROs could remain an appealing way to bolster total bank financing, particularly with bond-market volatility and the Greek financial crisis. The ECB approved another increase in emergency liquidity for Greek lenders on Wednesday, to 84.1 billion euros, to counter deposit outflows amid concern the nation is heading for a debt default.

“TLTROs are still attractive for various reasons, including for liability management and for carry-trade purposes, especially at current levels of yields,” said Frederik Ducrozet, an economist at Credit Agricole SA in Paris. “As long as banks meet their lending benchmarks, the ECB is likely to tolerate such behavior -- even more so as long as Greek stress persists.”

For more, read this QuickTake: Europe’s QE Quandary

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