The European Central Bank handed out the first of its new four-year loans to banks yesterday, the flagship tool in a new stimulus package it hopes will stave off price deflation and revive the ailing eurozone economy.
Take-up of the €400 billion offer of cheap credit from the eurozone’s central bank was low but banks will get a second chance in December to apply for the cash, which is granted on condition that they lend to businesses.
The launch of the scheme, a central plank of the ECB’s efforts to coax reluctant banks to lend more and fire up the bloc’s flagging economy, saw the ECB handing out €82.6 billion of such credit to 255 banks.
The success of the project is important for the 18 countries in the eurozone, grappling with record-high unemployment and fading economic growth.
But previous rounds of ultra-cheap ECB loans and borrowing costs close to zero have done little to boost lending to companies, with much of the money instead spent on government debt. Critics fear a similar fate for the new scheme.
Many banks were reluctant to participate in yesterday’s round, possibly for fear that it could single them out as struggling just weeks before the results of ECB-led health checks on the sector are announced.
“The European financial sector continues to be weak,” said Karel Lannoo of Brussels think tank the Centre for European Policy Studies. “There may be a stigma because the markets are waiting for the AQR (Asset Quality Review) in a few weeks.”
Yesterday’s poor take-up was worse than predicted by a Reuters poll of 20 money market traders, who said banks would take just €133 billion this week but return to snap up a further €200 billion on December 11.
The euro gave up gains after the news.
“This may disappoint the market,” said Johannes Mayr, an economist with BayernLB.
Banks are able to borrow up to €400 billion at tenders this week and in December, at a slight premium to the ECB’s regular price of funding. If they start lending more, they can take further cheap ECB loans running through to mid-2016.
“We would warn about drawing too strong conclusions from the September round,” said ABN Amro analyst Nick Kounis, who expects a total take up of €350 billion this year.
Another reason for banks holding fire is to find out more about a separate ECB programme to buy asset-backed securities and covered bonds.
Details are expected in October.
They may also choose to hold on to existing crisis loans from an earlier ECB programme for longer.
The ECB flooded the market with cheap three-year loans at the height of the debt crisis in late 2011 and early 2012.
They expire early next year and many banks are expected to use the new four-year loans to pay back such debt.
Lannoo said he was sceptical that the new initiative would lead to more lending to the smaller businesses that are the eurozone’s economic backbone as previous long-term loans to banks had failed to do so.
“Has this helped to improve credit to the private sector? Not much,” he said. “It has not reduced the divide between north and south.”
Figures today showing how much of those crisis loans banks will repay next week and the result of next week’s main refinancing operation may give an indication of how much will be rolled over into the new operations.