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What does the low demand for Sep. 18 TLTRO round mean?

Discussion in 'Current Market Sentiments' started by fx-recommends, Sep 20, 2014.

  1. fx-recommends

    fx-recommends Content Contributor

    Aug 6, 2008
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    With the positive point, we can start saying that there is lower demand for cheaper money to sustain the liquidity situation of the EU Banking sector, while these loans could be replace the actual existing LTRO which will be matured next January and February for lowering the weights on the banking sector further.

    But there are several negative points, as this means that there is actually shrinking in the demand dampens the investment spending driving down the forecast of having higher requests for crediting.

    EU Economy can be exposed to further downside risks with this disappointing investing sentiment which is actually materialized by low inflation levels subjected to be in the negative territory, after 4 consecutive months of watching consistent EUR slide with inflation readings from 0.5% to 0.3% not away from the negative territory where the market can see actual deflation pressure but away from the ECB yearly inflation target which is 2% y/y which has not been reached since Jan 2013 with existence below 1% since October 2013.

    Another thing; the previous 2 rounds of LTRO valued Eur489 and Eur529b in December 2011 and in February 2012 respectively led the ECB later in July 2012 to drive the deposit rate to zero for moving the banking sector to lend to have a positive impact on the real economy, as they could revive the banking sector and weigh down on the yields of the sovereign debts specially the indebted EU peripheral countries, after reaching new all times highs records by the end of 2011.

    The ECB has followed these 2 initial rounds by the OMT which could cap disintegrating of the single currency and stored confidence in the ECB ability to help in solving the debt crisis.

    The yields have watched considerable slide and it reached recently record but lows but until now these rates are still looking not enough to spur investment and economic growth in EU, after no change in Q2 following growth by only 0.2% in Q1 which are far away rates from US rates of growth or even UK rates.

    There was an initial estimation by the ECB that the next 2 TLTROs rounds can reach Eur400b, before making them 6 rounds can reach €1tr!, but after this round of TLTRO which ended on only €82.602b request, it looks that there can be a lot of working to be done by ECB’s APS which will have its details published next month, while the previous experiences have shown that program can be directed for business loans, home loans, credit card debt and whatever warranted of covered debts which can be sold to the ECB which had its balance sheet widened previously in 2012 because of this program to Eur2.7tr, before coming down to 2tr right now.

    The most important thing is that there is a greater probability of imposing a QE plan as a last mean to refresh the EU economy by the ECB and from my point of view and on my experiences with the ECB used language, this can be conditioned for having germane approval and getting over the constitutional disapproval.

    That can be also in a way like what has been done previously with the OMT which has not been exercised because of its conditions which led Spain and Italy to keep going directly to the money markets exposure for financing their debts despite of the higher costs to have no further complicated financial and political situations could not be bearable because of the EU rescue plans ties.

    From another side, The ECB itself knows as the markets participants know that The TLTROs are taking time to reach the real economy and it kept saying following each ECB meeting that it is awaiting for an effect on the real economy because of them, before finding itself forced to lower the deposit rate to zero on 5th of July 2012, before having it now at -0.2%, after August meeting which has given the market real dovish messages about the current economic stance and prices expectations in EU to show the need for further easing measurements, despite the current considerable low interest rate which reached 0.05% by cutting the refinancing interest rate by another 0.1% looked not enough to make a major change many of the markets pundits.

    So, there can be another question now. Can the ECB lower the refinancing interest rate below zero too and what can be the consequences?

    Actually the demand for single currency as a reserve has been dampened by having the deposit rate below zero. So, what about having the refinancing interest rate itself which touches lower levels of banking operations?

    I see as it is a stimulating step can be required, it can give much more dovish messages about the economic activity in EU.

    So anyway, it seems that the direct QE intersection is much more required in EU than more ECB's offers.

    Kind Regards

    FX Market Strategist

    Walid Salah El Din

    Mob: +20 12 2465 9143

    E-Mail: mail@fx-recommends.com

    #1 fx-recommends, Sep 20, 2014
    Last edited: Sep 20, 2014

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