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ECB calls money-printing a success ahead of possible extension
November 3, 2015 / 9:11 AM / 2 years ago

ECB calls money-printing a success ahead of possible extension

* Cheap finance to banks, QE makes borrowing easier - ECB

* Dec 3 meeting could see extension of QE

By John O‘Donnell

FRANKFURT, Nov 3 (Reuters) - Long-term loans to banks and money printing are making it easier for companies and the public to borrow, the European Central Bank said on Tuesday in a report that comes weeks ahead of a possible extension of such schemes.

The study, signed off by the ECB’s Executive Board including President Mario Draghi, shows its continued confidence in two key pillars of ECB strategy to rekindle the euro zone’s sluggish economy.

Draghi has signalled action to further loosen the supply of money is possible at the next meeting of the central bank’s policy setters on Dec. 3.

“Both programmes have had a positive impact on banks’ funding costs, which has incentivised them to pass on the cost relief to final borrowers by granting more credit at better conditions,” the report’s authors wrote.

In the study, ECB officials said long-term cheap loans (TLTROs) given to banks had translated into more than 100 billion euros ($110 billion) of credit to companies.

In total, banks have drawn down about 400 billion euros of such ECB credit. That is far lower than the amount originally envisaged but the ECB concludes that this measure, combined with its quantitative easing (QE) bond-buying scheme, cut borrowing costs.

By printing money and thus depressing the payout on government bonds, the ECB makes it attractive for banks to lend because the return on lending to companies or individuals starts to overtake that on state debt.

MIXED BORROWING PICTURE

The study highlights a loosening of borrowing terms - for those who want to borrow.

Companies across much of the 19-country euro zone, however, are borrowing less, following the financial crash and as confidence ebbs. There have been sharp annual declines in Ireland, Greece and Spain in recent months.

But credit in the euro zone’s biggest economy, Germany, has been rising, and the overall trend, has recently started to slightly improve, according to ECB data.

“QE is already giving a lot of liquidity and I do not see that there is demand for more to be satisfied by additional TLTROs,” said Francesco Papadia, a former top ECB official, looking ahead to possible ECB action in December.

“I would see, instead, further QE and a possible cut in rates as likely.”

Under the terms of the long-term loans, banks are required to lend on to companies and others in the first two years.

The ECB credit is extended from two to four years if banks prove they are lending more compared to their earlier trend of giving loans.

The more generous the banks are in giving credit, the greater the proportion of ultra-cheap ECB loan they can keep.

$1 = 0.9082 euros editing by John Stonestreet

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