Eurozone bank appetite for cheap central bank loans tops €1trn

Eurozone banks used the European Central Bank’s second round of cheap three year loans even more heavily than the first in December, but fund managers said the latest €529.5bn headline figure “does not solve the underlying solvency problems in the euro area”.

The Frankfurt-based central bank said it will lend 800 eurozone banks the money.

Many of the banks were also involved in the round one, bringing total borrowing past the €1trn mark.

Equity and sovereign debt markets could be the main beneficiaries of the extra cash, as they were when the ECB announced loans of €489bn (but only an estimated €80bn or so, once deducting existing loans transferred into LTRO, and usage by non-listed banks and other bank-license holders).

Between LTRO I in December and 12 February, yields on Spanish five-year debt fell by 19%, while yields on Italian debt of the same tenor dropped 37% as much of the cheap money went into the so-called ‘Sarkozy trade’, arbitraging higher yields in sovereign debt.

Shares also rallied, and the Euro Stoxx 50 index is up 9% this year.

But Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, said the two liquidity injections, of over €1trn as a headline figure, “do not solve the underlying solvency problems in the euro area, but they could push the crisis back into remission for a while if they give economic growth a boost.”

The eurozone economy is forecast by the European Commission to contract 0.3% this year, dragged down by contraction in many of the large debtor economies.

Greetham said overall, “the global backdrop is improving with the ECB’s action coming in the context of a wide range of easing moves from other central banks around the world. There are increasing signs that stimulus is starting to take effect and a US-led upswing in global growth is underway.”

Fidelity’s multi-asset funds went overweight in equities and commodities in February – the first time they had such a view since July 2011.

“The key question for us is how long the loose policy stance lasts. A premature curtailment of central bank liquidity, due to a rise in inflationary pressures or simply due to complacency, could lead to another downswing in global growth as we saw in 2011,” Greetham warned.

ECB officials have said they would be reluctant to bring a third tranche of loans to market.

But research analysts at Credit Suisse said before LTRO II, “we do not think that this is necessarily the last three-year LTRO, or that this is the longest duration that will ultimately be offered, but clearly this will depend on how the economic environment develops.”


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