Markets Look to ECB Loans for Europe’s Next Trillion-Euro Moment

Markets are looking forward to another trillion-euro milestone in Europe’s fight to bolster economies that saw decades of growth wiped out in months.

The European Central Bank is expected to receive demand in excess of that eye-catching amount for its latest wave of cheap loans to the region’s financial sector Thursday. The flood of generous bank funding, intended to encourage lending to companies and households, will reinforce its crisis response at a time when fear about a potential second wave of Covid-19 infections is stalking investor sentiment.

Sensitivity to the amount of liquidity provided by the loans, known as TLTROs, is likely to show in the bond market. A strong injection may help support demand for the region’s government debt by providing banks with funding they can use to buy it. But a smaller influx would likely hurt demand for riskier securities, such as those issued by Italy.

“The June TLTRO should be huge,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “The ECB is determined to focus in the bank channel and address any liquidity issues.”

TLTRO is just one of the measures the ECB is using to help European economies face the biggest contraction in living memory. The institution’s 1.35 trillion euro pandemic purchase program has served as a backstop to eurozone debt markets, helping to boost the appeal of even the riskiest of government bonds. Italy saw the yield on its benchmark bond tumble more than 150 basis points from its highest point in March.

But according to estimates from Citigroup Inc, the recent 600-billion-euro ($673 billion) increase in euro-area quantitative easing could fall150 billion euros short of the bloc’s overall increase in debt supply.

Last week alone, sovereigns raised 32 billion euros from the sale of syndicated bonds, pushingtotal issuance in Europe to 1 trillion euros so far this year. And a German auction this week sold the largest amount of 10-year bonds since 2014.


The ECB is offering rates on TLTRO loans — short for targeted longer-term refinancing operations — that could fall as low as minus 1% to incentivize banks to lend into the real economy.

Take-up Forecasts at Major Banks
  • Commerzbank AG: 1.3 trillion euros
  • UBS Group AG: 1.2 trillion euros
  • JP Morgan Chase & Co: 1.2 trillion euros to 1.3 trillion euros
  • Danske Bank A/S: 1.5 trillion euros

Isabel Schnabel, the ECB’s board member in charge of market operations, said inremarks that surveys point to a take-up of around 1.4 trillion euros for the whole of the current TLTRO program, which offers loans every three months. Signs of demand around that level on Thursday alone should help dismiss any lingering fears about interbank lending and keep the economy humming along.

Strong demand would also provide reassurance that the policy remains a viable weapon in the ECB’s arsenal, alongside its PEPP program, which expanded its QE stimulus. Euro-area governments are also discussing the issuance of joint bonds to fund their response.

The expectations for such strong demand is due in part to a series of repayments and expiries from the program’s earlier phases.

“We continue to expect a large take-up of about 1.2 trillion euros which would result in a net liquidity injection of 440 billion euros,” said Frederik Ducrozet at Banque Pictet & CIE in a note to clients. He points out that take up needs to be “at least 750 billion euros” for liquidity not to shrink.

Doing the Math
  • The net liquidity boost provided is found by taking the total issuance and subtracting 760 billion euros, made up of:
  • 389 billion euros in bridging loans
  • 214 billion euros in early repayment of previous loans
  • 157 billion euros in expiring TLTROs
  • Banks’ current outstanding TLTRO holdings are about 263 billion euros net of maturing or voluntary early repayments already announced, according toECB data

At the lower end of expectations, Mohit Kumar, managing director at Jefferies Financial Group Inc., sees no urgency for banks to seek funds and expects total take up of 750 billion euros. “We have a TLTRO every three months so there’s no need to pile up all the liquidity in this one.”

The potential significance for wider risk appetite from the TLTRO number has grown in line with concern that the global rebound since March’s lows could have run too far ahead of fundamentals. Any sign that the recovery could face a setback is likely to stand out more starkly against that backdrop.

A surprisingly low number could also prompt concern about liquidity at banks, after the Stoxx index tracking the sector’s shares rebounded by around 35% since its lows, in line with the recovery on the wider Stoxx Europe 600.

“If the ECB doesn’t manage to create 500 billion euros in new liquidity even at these terms, European banking is in a deeper mess than what most people think, and QE, therefore, is the only true policy tool left with the ECB,” said Rishi Mishra, an analyst at Futures First.

— With assistance by Piotr Skolimowski, and Paul Gordon

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