Who believes ECB’s refinancing programmes are game-changers?

LONDON | The latest edition of the liquidity expansion programme developed by the European Central Bank received Wednesday a warm welcome among several investment houses in the City. From their point of view, Long-Term Refinancing Operations or LTRO would not only help keep afloat European entities, within and out the euro zone, but prop up optimistic prospects over the global economic performance.

In a report Schroders released today, chief economist Keith Wade said figures were improving despite on-going uncertainty:

“We have upgraded our forecasts for global growth in response to better data and a further easing of policy. In particular, the success of the European Central Bank’s (ECB) long term liquidity operations and surprising resilience of Germany mean that we expect the recession in Europe to be shallower than before.”

Schroders perceives the economic panorama as still weak, though. In particular, the fund does not see US activity taking off as the de-leveraging process has further to run and much of the recent improvement in growth would simply be consequence of an inventory cycle adjusting. The principal risk to the asset manager’s outlook is one of increased oil prices with the current threat coming from the stand-off over Iran’s nuclear plans.

“The energy tax is already rising, and a spike in prices could send the world economy back into recession,” Wade added.

On the other hand, notwithstanding the Greek debt labirynth, Schroders told investors that the European credit crunch appears to have been tempered by the 3-year liquidity auctions from the ECB.

“Longer term cheap financing to the banking system may have averted a European Lehman Brothers event, [and] lower the cost of borrowing for the Spanish and Italian governments.”


Azad Zangana, Europe economist, said that there are signs of improvement in the European economy even if banks are still under pressure to deleverage, and with fiscal tightening taking place for the next three years, it is plausible to forecast recession in peripheral Europe. According to Zangana,

“core Europe appears to be more resilient than previously thought, though will probably struggle to take off given such weak demand from its neighbours. Nevertheless, it appears that the outlook has improved from a few months ago, which reduces the likelihood that the ECB will conduct quantitative easing.”

At BlackRock, chief equity strategist of fundamental equities Bob Doll described ECB’s LTRO programme as ‘a game-changer’, even if investors are skeptical.

“For the time being,” Doll pointed out, “the safety net called Long Term Refinancing Operations (LTRO) initiated by the ECB to support the region’s banks has made European sovereign debt issues a bit less important than they were only very recently.

“…the ECB’s LTRO program is a game-changer in our view. The program not only addresses funding stress in the banking system but has done so without compromising the central bank’s principle of not lending to sovereign governments. But ultimately, there is no quick remedy to slow economic growth except monetary and fiscal stimulus.”

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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