Solvency crisis masked by an influx of liquidity: the ECB applies the same old recipes to try to solve the same old crisis … but not sure that it works this time around.
Since 2009, the European banking sector has only stood up thanks to the rounds of LTRO and TLTRO that the ECB continues to grant and relax.
Without this continuous infusion of new money, our banks would find themselves with a slight concern for “liquidity” (I refer the reader to the articles I devoted to this subject between 2018 and 2019 – see in particular here, here, here and the).
In the month of June, The echoes indicated that 60% of the € 1,300 billion borrowed by European banks from the ECB would be devoted to “the refinancing of previous TLTROs”, ie around € 800 billion.
As it does for states, the ECB therefore allows banks to continue to “roll” their debt. And through banks, it is non-financial companies and households that can continue to get into debt.
Thanks to the Good Samaritan of Frankfurt, all categories of economic agents pursue the financial cavalry in concert.
At its last monetary policy meeting, the ECB’s Governing Council once again loosened the floodgates.
This is not really a reassuring sign …
December 10, 2020: TLTRO-III again extended and facilitated
If you missed the previous episodes, know that after TLTRO-I of 2014 and TLTRO-II of 2016, we are now at TLTRO-III.
Announced on March 7, 2019 and inaugurated in September 2019, this new series of targeted long-term refinancing operations for the banking sector at a rate of up to -1% was initially scheduled to end in March 2021, before being extended. until June 2021.
You read that correctly: by borrowing at -1% from the ECB through these waves of giant loans, European banks earn money. Through this rate, the idea is to offset the cost of the excess reserve deposit facility rate with the ECB, which rate amounts to… -0.50%.
Welcome to the world of negative rates …
Balance sheet, refinancing rate and deposit rate of the ECB as of December 10, 2020
On December 10, the ECB further relaxed its policy vis-à-vis the credit channel.
First, the term of these hyper discount credit facilities has been extended by 12 months, until June 2022.
In addition, “the Board of Governors has also decided to increase the total amount that counterparties will be authorized to borrow during TLTRO III from 50% to 55% of their outstanding eligible loans As the press release indicates.
Clearly, the -1% loan limit taken out by each banking institution has been increased (not enough according to some) – it is up to banks to maintain their level of credit to households and non-financial companies at what it was before. pandemic to benefit at the most advantageous rate of the “three additional operations [qui] will be […] carried out between June and December 2021. “
In addition, four new PELTRO operations (which were supposed to end in December 2020) were announced for 2021. Note that the calls for tenders took place at a fixed rate, namely the average rate of the main refinancing operations (MRO , currently at 0%) over the duration of each trade, reduced by 25 basis points. As you can see from the chart above, PELTROs are not much compared to TLTROs, which is hardly surprising considering the spread between the two.
History of ECB lending operations to commercial banks in the euro zone (2007 – December 2020, via Frederik Ducrozet)
If these acronyms leave you wondering, here is their respective meaning summarized in a few lines:
LTRO and PELTRO = safety nets non-targeted to ensure liquidity in the interbank market (and tighten the spreads rate). Weak demand for PELTROs because loans remunerated at “only” 0.25%;
TLTRO = loans targeted to stimulate credit within the Eurozone (and tighten spreads rate, since part of the TLTROs is also used to reimburse the previous TLTROs). Strong demand because loans paid at 1%.
In short, it is neither more nor less than a vast system of subsidizing the activity of credit, or the zombification of the European economic fabric like what happens in planned economies – that is, is as you prefer.
PEPP, TLTRO, PELTRO: what to expect in 2021-2022?
We are finally up to date with the main thrusts of the ECB’s monetary policy. What to expect next?
If you want my opinion, we’re going to be entitled to some more of the same for a while, before the ECB is forced to take new instruments of torture out of its basement.
The day after the December 10 meeting, AGEFI indicated:
“The ECB’s modification of targeted long-term refinancing operations (TLTROs) is not entirely convincing. “
In the short term, here is what Frederik Ducrozet, strategist at Pictet Management, expected the day after the December 10 meeting:
” […] We can’t help but think that this is not the end of the story. An increase in traditional QE (APP) remains likely in 2022 because inflation is below target. We also expect a further relaxation of TLTRO conditions in 2021. […]. “
And for good reason, we must distinguish between health crisis and economic crisis. The second will last longer than the first, and the ECB has affirmed and confirmed that it will do whatever is necessary to counter the economic impacts of the health crisis.
Regarding TLTROs, here are the borrowing capacities by “country” (in red = used; in gray = remaining) as represented by Frederik Ducrozet on December 10.
This may be fair for Italian and Spanish banks …
Never mind, on December 1, Isabel Schnabel, member of the ECB’s Executive Committee, told Bloomberg about the effective TLTRO rate (-1%) that “there is no technical reason why it couldn’t be lowered any further. “
In order to ensure that higher risk banks have access to long-term refinancing operations, it can also be considered that collateral requirements are relaxed again.
Like all major central banks, the ECB will continue to cover up a solvency crisis by flooding the liquidity system
One thing is certain, it is well that we can count on Christine Lagarde to continue to extend the action of Mario Draghi.
But as Bruno Bertez wrote on December 14:
“Draghi’s whole policy was to make sure that the donkeys that were no longer thirsty drink anyway. That is to say, to lower interest rates, even to put them negative in order to lower the credit price and therefore make economic agents go into debt more, much more. He offered the credit, he made it free, he sold it off.
Donkeys were no longer thirsty because they were and are over-indebted, insolvent they know that the solvency crisis which has been going on since 2006 has been masked by a sprinkling of liquidity. They know that quantitative easings, that is to say the purchases of long-term debts, have as their raison d’être to support the courses, the prices of the debts.
Without QE, debts would depreciate. Without QE, the price of debt in the markets would collapse because these debts are not repayable. “
As I explain in this video, at the end of 2020, global debt reached 365% of GDP, according to figures from the Institute of International Finance.
When he was at the ECB, Mario Draghi spoke only of minor liquidity problems, but now that he is retired, he is less shameless in pronouncing the “S word”.
December 14: “Policymakers around the world must act urgently if they are to avoid a looming solvency crisis that could cripple economies after the pandemic”
Whoever is at the head of the ECB, this does not change the case: the Frankfurt institution continues to use the good transmission of monetary policy and the economic recovery as a pretext to camouflage a crisis of solvency which affects (almost) all categories of economic agents, flooding the system in a theoretically infinite tsunami of liquidity.
But here it is: in practice, hoaxes do not last forever.
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