Europe: S&P’s, TLTRO II is coming up and the ECB is ready to lend at negative rates

The European Central Bank (ECB) has announced a new series of four targeted long-term refinancing operations (TLTRO II), as part of its new latest accommodative measures. Standard & Poor's economists view TLTRO II as a key element of the ECB's credit easing policy, and we believe it will support bank lending by easing term-funding costs, despite subdued private sector demand.
 
"Assuming fully repaid funds from the first TLTRO, eurozone banks could borrow up to €1.7 trillion under this new program (30% of the €5.7 trillion eligible loans amount)," Standard & Poor's economist Sophie Tahiri said in a report titled "TLTRO II: The ECB Is Ready To Lend At Negative Rates”. "We think this assumption is realistic because the ECB will allow banks to repay the first TLTRO in anticipation of the new program starting."
 
In our view, most eurozone banks will meet the 1.2% benchmark and hence be able to benefit from the most favorable borrowing conditions, as we assume the positive trend in credit flows will continue for the next couple of years.
 
ECB President Mario Draghi has stated that the first TLTRO series was successful. Indeed, TLTROs have been able to provide the necessary liquidity to banks at a time of redemption of the two series of the three-year LTROs introduced in December 2011 and February 2012.
 
However, the program has not been completely successful in significantly boosting bank lending growth. Euro area banks' loans to the private sector started to fall in 2012, and TLTROs seem to have stopped this decline. Since 2014 the stock has remained constant. The magnitude of the positive impact has not been as large as it could have been because the major economies afflicted by low growth have suffered from banking systems being on the mend, as well as high debt levels.
"The new TLTRO is likely to enhance the ECB's balance sheet, but only marginally" Tahiri said. "The faster QE purchase pace (as announced in the March meeting) has overshadowed the TLTRO as the main tool to expand the balance sheet".
 
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