Big Decisions Loom for Financial Markets
This week traders in all global financial markets will be paying attention to the upcoming meeting in the ECB and their assessment about the TLTROs (targeted longer-term refinancing options), as the first deadline is coming to an end.
TLTROs are an ECB mechanism that provides credits to financial institutions for a maximum 4-year period. The total amount allotted in 2016 and 2017 was 739 billion euros. The main objective is easing the conditions of the private banking sector in order to stimulate lending.
The ECB is expected to be more specific about when or by how much the beneficiaries refinance their loans. If they favor refinancing, the markets are expected to react in a smooth way. This is the most likely scenario according to market experts. According to Reuters, the ECB is expected to give EU banks new long-term loans to keep credit flowing throughout the region, with the hope that the loans will keep businesses afloat and will not aggravate the current economic slump further.
The evidence shows that the TLTROs have worked thus far, as European banks have favored credit expansion in the last year. Recent surveys have shown their preference for lending money to small businesses and the easing credit conditions. Traders are focusing on these loans now as once the remaining maturing of outstanding loans is less than one year, borrowers will have greater incentives to repay the loans to the ECB, which would shrink the central bank’s balance sheet and force banks to find more expensive funding. In fact, as the deadlines are approaching, the banks are coming back to a more conservative approach towards lending money in the real economy, since the incentive of paying the loans back is now higher. A huge sign of this is the fall of corporate lending growth in January. Keeping affordable funding available will solve this problem. A decision relating to new TLTRO may be as early as March 7, or as late as June.
In the same spirit, several important events are happening in the coming weeks. One of them is the fate of the Brexit as the British parliament is meeting next week and voting three times about the probable departure of the United Kingdom from the Eurozone. The other one is the outcome of the negotiations between the United States and China which could mean the end of the current trade Feud. The Wall Street Journal expects both sides to reach a deal by March 27 even though President Trump is sending somewhat mixed signals as he aims for reelection in 2020.