According to leaks to Reuters about the future format of TLTROs, the third edition of these operations will be designed to limit entities’ appetite for them, with options like toughening the rules for collateral and the establishment of more ambitious targets for credit volumes. According to ECB sources, this reflects the belief that Eurozone economic fundamentals are stronger than in previous years.
In practical effects, the lesser application of the TLTROs III which the ECB seeks, again according to anonymous central banks sources, would translate into the renewal of less than 5 billion euros of the current TLTROs II whose active volume exceeds 7 billion euros.
At the same time, the interest rates to be applied to the TLTROs III are being debated. Leaks to Reuters are surprising since they suggest an initial interest rate which would imply a premium of 25 basis points over the current interest rate on the principal refinancing operations (0%). An interest rate, which, in principle, could be progressively reduced if the entities meet certain credit concession targets.
At Intermoney, the content of these leaks strikes us as unexpectedly harsh. In fact, the same sources suggest that there are softer factions in the ECB which are demanding a study of more generous outcomes. This seems logical given that, if not, the entities’ interest in the first operations of the TLTROs III, at the end of 2019, would be significantly reduced.
At the moment, the hardliners are winning the debate in the ECB, given that the principal refinancing rate (currently 0%) is always regarded as the lowest applicable rate. But this is still being discussed, and the application of a lower rate, even negative, remains possible if the Eurozone economy performs worse than expected. The delay in launching the new TLTROs and announcing their details, therefore, could be linked to the need for more information on the performance of the Eurozone before taking the first step. Nevertheless, the conditions for the TLTROs will be probably be announced at the June meeting.
In conclusion, if the leaks are correct, the position of the ECB on TLTROs III will be less generous than expected, even if investors’ doubts about the future could lead to changes in Frankfurt.
*Image: European Central Bank
