January 16, 2015 / 12:15 PM / 5 years ago

Unwinding crisis loans add to pressure for ECB bond buying

* Unwinding crisis loans shrink ECB balance sheet

* ECB wants to expand its balance sheet to deploy stimulus

* Balance sheet dynamics raise pressure for QE next week

By Paul Carrel

FRANKFURT, Jan 16 (Reuters) - A fresh repayment of crisis loans next week will have a tightening effect on the European Central Bank’s policy stance, bolstering the case for it to deliver a broad bond-buying plan at a crunch Jan. 22 meeting.

The repayments have a shrinking effect on the ECB’s balance sheet - just the opposite of what the central bank wants to achieve - and leave it swimming against the tide of its own past policy measures as they unwind.

The ECB said on Friday banks would repay 13.864 billion euros next week in loans they took at the height of the euro zone crisis in late 2011 and early 2012. Some 196 billion remains to be paid before they mature later this month and next.

That means the ECB’s balance sheet, which fell to 2.169 trillion euros last week as banks took less in weekly ECB loans, might even dip below 2 trillion euros in the coming weeks as the remainder of the so-called LTRO 3-year crisis funds are repaid.

The direction of travel is wrong for the ECB, which wants to grow the balance sheet towards 3 trillion euros by injecting money into the flagging economy with a view to stimulating demand and buoying inflation, which has turned negative.

A batch of asset purchase plans and new loans the ECB launched last year have failed to prevent the balance sheet shrinking, effectively leaving the ECB with only one tool to hit its target: a broad sovereign bond-purchase plan.

The ECB’s policymaking Governing Council meets next Thursday, with market expectations high that it will announce just such a programme of so-called quantitative easing (QE) - essentially money printing to buy sovereign bonds.

Intervening in the large, liquid government bond market would allow the ECB to achieve the scale of impact it has failed to have with other stimulus measures. ECB Executive Board member Benoit Coeure said the scale of such a plan was key.

“For it to be efficient, it has to be big,” he told the Irish Times in an interview published on Friday.


Another Governing Council member, Ewald Nowotny, said earlier this week the shrinking balance sheet effect risked tightening policy and that “it would make sense to act on the monetary policy front”.

The balance sheet may have dipped again this week, as banks took a similar amount in weekly funds but repaid some 14 billion euros in LTROs this week.

Other stimulative measures the central bank began deploying last year have proven to be small-scale so far.

A covered bond buying programme has amassed a volume of 31 billion euros, and the ECB’s purchases of bundled loans known as asset-backed securities amount to less than 2 billion euros.

Banks took just over 200 billion euros in two shots of cheap, four-years the ECB offered last September and December - far less than the 400 billion euros on offer last year.

The combined effect of those stimulus plans still leave the ECB with much to do if it is to buoy prices in the euro zone, where inflation is running at -0.2 percent - far below the ECB’s target of just under 2 percent.

“The aim of a QE is to ensure trust in the capacity of a central bank to stabilise inflation,” Coeure told French newspaper Liberation in another interview.

“We will take the U.S. and British experiences into account to determine the amount of bonds to buy in order to restore confidence in the fact that inflation will come back to a level close to and below 2 percent.” (Editing by Dominic Evans)

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