By Dhara Ranasinghe

LONDON (More Bank) – Cheap credit lending, a form of stimulus launched by the ECB during the global financial crisis, is expected to return in the coming months, and investors anticipate shorter-term loans with more money. a variable rate to give the central bank flexibility.

Just two months ago the European Central Bank completed its € 2.6 trillion bond purchase system, but with euro zone growth at its lowest in four years and other global central banks already returning to tightening monetary policy and expectations of the ECB's bond market the action is on the rise.

This should take the form of a set of loans for banks, called Long Term Refinancing Operations (LTRO) or more targeted TLTROs. Details could be released in March or June at ECB meetings that would coincide with updates of the central bank's economic forecasts.

LTROs or TLTROs – which, according to ECB sources, are a priority over other measures – should help reduce the costs of financing businesses and households and offset the impact of Negative interest rates on banks, investors say.

They should also raise prices – the latest TLTRO round of 2016 raised inflation by 0.3% over two years, says Pictet Wealth Management.

However, it is unlikely that the new package will be as favorable as in the past, as the economy is doing better in relation to the 2011-2012 debt crisis or even in 2016 when the ECB deployed a combination TLTRO, rate reductions and asset purchases in addition to deflation.

The ECB is considering a new low-cost loan program to boost the economy

So what will the program look like?

The 2016 TLTROs allowed banks to lock down lending rates as low as the ECB's new lower deposit rate of minus 0.40%. The loans had a maturity of four years.

This time, investors expect the ECB to opt for a shorter term, say two years.

"I do not think they (the ECB) have to go as big as in 2016 – while there was a risk of real deflation," said Francois Savary, CIO of Prime Partners, which also anticipates fixed rate loans.

"But it is clear that it is possible to do something because the financial system in Europe is not yet fully recovered."

One idea is to make TLTROs a permanent facility with floating interest rates following the ECB's main refinancing operation, a source told More Bank in December.

A variable rate would give the ECB room to raise rates, strategists said.

"Unless the growth momentum deteriorates further, the new LTROs should have a shorter maturity, say two years and a variable rate, leaving the door open for rate hikes in the coming years," said Frederik Ducrozet, Strategist Pictet Wealth Management.


Interest in the new TLTROs will also be important, as investors believe that it will provide clues to the ECB's rate outlook. Despite the economic rampage, some politicians would be reluctant to change their current forecasts for a rise in rates until 2019, the term of the head of the ECB, Mario Draghi ending in October.

Shweta Singh, senior economist at TS Lombard, said the design of the TLTRO program would have a big impact on the trajectory of rates.

"If they decide to choose a fixed interest rate on TLTRO loans, this suggests that the ECB expects its policy to remain weak for a longer period", a- she declared.

With regard to the timetable, the ECB is encouraged to act by June, as it will want to avoid liquidity shortages that could arise from mid-2020, when previous TLTROs begin to mature.

The first maturities would already begin to affect bank financing costs as of mid-2019, as banks need to have funding with a term of at least a year to comply with regulatory requirements.

Under the stable net funding ratio, euro area banks need to have some multi-year funding.

Italy and Spain, where the use of these loans was the highest, are considered the most vulnerable to this type of cliff scenario. It is therefore not surprising that government bonds and bank stocks in these countries tend to come together whenever TLTRO speculation occurs.

For an interactive version of the table below, click here

Estimated distribution of all TLTRO-II holdings

The ECB also has another option: to delay TLTRO payments by one year in June 2020, said Hetal Mehta, senior European economist at Legal & General Investment Management.

"This would be the path of least resistance.To find a new regime and new criteria might be more difficult, but the ECB has a model, it has already done so many times," Mehta said.

(Report by Dhara Ranasinghe, additional report by Josephine Mason, graphics by Ritvik Carvahlo, editing by Sujata Rao and Susan Fenton)