The ECB (European Central Bank) stands ready with unlimited cash for banks as lenders try to reposition more than $765 billion of debt that matures this year, just as institutional buyers remain disinclined to purchase debt from all but the most secure banks. “February’s second three-year Long Term Refinancing Operation looks set to be extremely large,” Credit Suisse Group AG analysts led by William Porter reported to clients. “The last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best.”
“People aren’t prepared to lend to the banks, so the ECB is just flooding the market with liquidity,” stated Christopher Wheeler, an analyst at Mediobanca SpA in London. “But it’s only a temporary fix. The ECB is only buying time with these loans hoping that things will improve.”
The growing appetite of more than 500 lenders in December, overshadow the 293 billion-euro estimated by economists who were polled by Bloomberg News. One half of all the loans were taken up by Italian and Spanish lenders, Morgan Stanley analyst Huw van Steenis said in a Jan. 18 in a report to clients. In all, banks may borrow between 150 billion Euros and more than 400 billion Euros next month, van Steenis said. “It seems even large cap banks have been open-minded to using this given the size and lack of stigma of the first one,” he wrote.
Other observers noted the ECB’s decision to lighten the directives on what banks can offer as collateral for the loans could send demand higher. Mario Draghi stated the ECB would ease the collateral requirements at a press briefing on Dec. 8. Details on the new rules have not yet been made public.
“The ECB is still deciding what will constitute acceptable collateral,” Marchel Alexandrovich, an economist at Jefferies International Ltd. in London observed. “If criteria are loosened enough, then demand for cheap money will undoubtedly swell up and we may well see a figure in excess of 1 trillion Euros” at next month’s operation.
Credit Suisse’s Porter said he believes banks will borrow a bit more than in December, to the tune of about 500 billion Euros, because they want to stay competitive when others can borrow at a reduced rate from the ECB. “This will remove some of the refinancing risk the banks face and the markets are reacting positively after a bit of a delay,” Porter stated in a telephone interview. “But the more fundamental question is how ‘long can you run a banking system like this?’”
In short, there are growing fears that, like households, banking systems are risking their prosperity and sustained economic growth by accumulating more debt, fears that will likely be realized at least in part by the European Central Bank.