On March 7, the ECB announced a set of three measures, the timing of which was ahead of consensus expectations. While the timing of the ECB policy changes was in line with our expectations, the details available so far could leave room for disappointment. While these details will be announced in ‘due course’, we list 8 reasons why markets may be disappointed by the latest ECB package.
1 - Loans of shorter maturity - two years rather than four
2 - Loans to have floating interest rates not fixed
3 - Limited capacity for Italian and Spanish lenders to borrow under the new TLTRO scheme
4 - Uncertainty about what the floor rate on TLTRO-III borrowings will be and what benchmarks the ECB will apply for banks to benefit from TLTRO-III subsidies
5 - Markets may be anxious about rolling over their TLTRO-II borrowings between June-2019 (when the funding ‘cliff edge’ starts to bite) and the September -2019 starting date for the first series of TLTRO-III borrowings.
6 - The ECB downgraded its growth forecast for this year to 1.1% from the earlier projection of 1.7%. The downward revision was in line with our expectations, but it has disappointed the consensus
7 - The most important point is that TLTROs do not address the problem of weakening eurozone growth and loan demand
8 - TLTRO-III merely postpones the funding risks for Italian and Spanish banks
On 7 June the ECB downgraded its growth forecasts further. The detail of the TLTRO-III lending plan disappointed the markets and fell short of our lower expectations.