Rakan Mosely Head of Financial Markets Phone: (0)20 7803 1400 rmosely@oxfordeconomics.com
The ECB s TLTROs: bazooka or peashooter? Ben May Senior Eurozone Economist bmay@oxfordeconomics.com June 2014
Outline What impact have the measures already had? How will the TLTRO programme work? How much demand will be for the loans from banks? Will it lead to a pick-up in bank lending? What are the likely effects on the economy?
ECB has reduced short-term rates Euro area: market interest rates % 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Eonia 3m Euribor 0.0 2011 2012 2013 2014 Source: Oxford Economics/Haver Analytics/ECB
longer-term rates lower too Eurozone: Sovereign AAA yield curve (f'wd rate) % 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 7th May (the day before May's ECB meeting) 5th June (the day before June's ECB meeting) 16th July -0.5 0 1 2 3 4 5 6 7 8 9 10 Years Source : Oxford Economics/Haver Analytics
but the impact on the euro has been muted Eurozone: Exchange rates Index - Q1 1999 = 100 $/ 106 1.45 105 104 103 102 101 100 99 $/ (RHS) Nominal effective exchange rate (LHS) 98 2013 2014 Source : Oxford Economics/Haver Analytics May MPC meeting June MPC meeting 1.43 1.41 1.39 1.37 1.35 1.33 1.31 1.29 1.27 1.25
TLTROs could provide a major stimulus Eurozone: Relative size of the TLTROs % 20 18 16 14 12 10 8 6 4 2 0 Bank lending to Eurozone GDP private sector (excl mortgages) Source : Oxford Economics/Haver Analytics Size of the TLTRO programme if banks took their full allotment measured as a share of GDP, banks' assets and total bank lending to the provate sector (excluding mortgages) Eurozone banks' assets
to both the core and the periphery Eurozone: Estimated share of TLTROs Portugal Greece Ireland Other Spain Germany Italy France Finland Austria Belgium Source : Oxford Economics/Haver Analytics Netherlands
The details 8 In theory 1trn can be borrowed by banks. 400bn this year and 600bn at six subsequent auctions. All loans mature in September 2018. The interest rates will be the refi rate at the time of the auction plus 10bps. Banks borrowing limits for the first two auctions are based on their outstanding lending as of April 2014. Subsequent entitlements will depend on banks lending behaviour in May 2014 and beyond. Conditions must be met to avoid repaying loans two years early.
Three-year LTROs have been repaid early Eurozone: Outstanding ECB LTROs bn 400 350 300 250 Spain Italy 200 France 150 100 50 Germany 0 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Source : Oxford Economics/Haver Analytics
but the TLTROs look attractive for banks ECB is effectively giving struggling banks a licence to increase their lending. The interest rate looks enticingly low. The lending conditions are not especially onerous. It won t require a major change in behaviour to avoid early repayment or to borrow more at the latter six auctions. Banks can repay the loans early if they want. 10
In the near term, ECB lending to banks will fall Eurozone: ECB lending to banks bn 1600 Historic data 100% take up of TLTROs 1400 75% take up of TLTROS 1200 50% take up of TLTROs No take up of TLTROs 1000 Forecast 800 600 400 200 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source : Oxford Economics/Haver Analytics
Could lead to a switch back to bank financing Eurozone: Bank lending and debt issuance bn 60 40 Net securities issuance by non-financial corproations 20 0-20 -40-60 Monthly change in net lending to the private sector, excluding mortgages -80 2011 2012 2013 2014 Source : Oxford Economics/Haver Analytics
Small rises in lending may still have a big impact Eurozone: GDP % year 4 3 2 Forecast Larger investment shock 1 0-1 -2-3 -4 Smaller investment shock Baseline -5-6 2004 2006 2008 2010 2012 2014 2016 2018 Source : Oxford Economics/Haver Analytics
Implications for monetary policy Impact of the TLTROs is highly uncertain and will take six months, probably longer, before it is possible to come to any judgement on its effects. But the effects on the macro economy are potentially large. Accordingly, the ECB will probably need to see strong evidence that the programme has failed before it is prepared to contemplate taking further significant policy action By then, we suspect that the worst of the negative effects from energy and food prices will have subsided and the euro may have weakened further. In other words, by then, the risk of deflation may be too slim for the ECB to contemplate QE. 14
Questions? Thank you! Ben May Senior Eurozone Economist bmay@oxfordeconomics.com June 2014
Rakan Mosely Head of Financial Markets Phone: (0)20 7803 1400 rmosely@oxfordeconomics.com