ECB TLTRO Fails to Attract Much Interest – QE Threat Lingers

Slow Uptake of TLTRO Funding It seems European banks are not all that eager to take up more central bank credit. The ECB has begun to offer its dirigiste ‘targeted long term refinancing operations’ at a spread of 10 basis points above the repo reference rate. Since the repo rate was lowered from 0.15% to 0.05% at the last ECB council meeting in early September, this type of funding has become even cheaper. However, when banks obtain funding by posting collateral with the ECB, this automatically creates additional bank reserves – and those bear a penalty rate of 20 basis points these days. We continue to be mystified by the introduction of the penalty interest rate on bank reserves. We have no idea what it is supposed to achieve and in fact we suspect that it actually achieves the opposite of what the ECB ostensibly wants.
One of the goals is to weaken the euro, which is quite a hare-brained idea, as a weaker euro will affect consumer purchasing power across the euro zone negatively. Note that the euro area just posted another strong increase in its trade surplus. So even those who believe that a positive balance of trade is in any way indicative of an economy’s health (which is nonsense to begin with), will have to admit that the euro zone’s export sector hardly appears to be in need of an extra boost.
As to the TLTRO funding, this is extra-cheap long term bank refinancing tied to certain conditions – banks must use these funds to extend private sector credit (exclusive of mortgages). In the event they use the funds for other purposes like e.g. more carry trades in government debt, they merely need to repay the TLTRO funds two years earlier, in 2016 instead of 2018. Since there is very little private sector credit demand, it should perhaps not be too surprising that the first round elicited very little demand. Reuters reports:

This post was published at Acting-Man on September 19, 2014.