October 30, 2013 / 3:42 PM / in 4 years

ECB set to boost banks with more cheap cash: economists

LONDON (Reuters) - The European Central Bank will soon provide another shot in the arm for Europe’s strained banks with a more cheap, long-term loans, according to a firm majority of economists polled by Reuters.

Forty-four out 59 analysts surveyed this week said the ECB would inject more liquidity into the banking system, probably early next year, to help foster the euro zone’s fragile economic recovery.

The poll also showed the central bank’s main refinancing and deposit rates would stay on hold at record low levels until at least early 2015, the end of the survey’s forecast horizon.

Although the euro zone economy is slowly improving, with Spain on Wednesday the latest to announce its emergence from recession, the poor health of the region’s banking system will likely hobble the recovery.

The ECB has already injected more than a trillion euros into banks through two long-term refinancing operations (LTROs), in December 2011 and February last year.

But the first tranche of those three-year loans are due for repayment late next year, and that could be a strain for some of the euro zone’s more vulnerable banks.

“Several parts of the banking system, notably in the (euro zone) periphery, may not be able to repay existing loans in full before early 2015 without causing money market stress,” said Elwin de Groot, euro zone economist at Rabobank.

“By extending the maturity the ECB will be able to smoothen this process.”

ECB President Mario Draghi said last month it was ready to offer banks more long-term loans to keep money-market rates from rising to levels that could push inflation too low.

Euro money market traders polled on Monday also said another LTRO could be on the way, although by much a slimmer majority than the latest poll of economists.

By contrast, the focus on policy at the U.S. Federal Reserve and Bank of England is on the timing of policy tightening, rather than the introduction of further measures. <FED/R> <BOE/INT>

Asked on the timing of a new round of ECB loans, the most common answer was the first quarter of next year.

Half of respondents said it would take the form of another three-year loan, with most of the other answers split between smaller maturities.

Of the minority who thought there would be no more big injections of ECB cash, responses varied. Some thought the ECB could extend the maturity of its existing loans, while others thought no further action should be needed.

“Markets seem to have understood the ECBs resolve to keep money market rates low for an extended period. Probably, this will be sufficient, so that further accommodative measures will not become necessary,” said Kristian Toedtmann, economist at DekaBank.

“But even if short term market rates rise again, another LTRO would not be the best instrument, since there is no general lack of liquidity.”

Polling by Shaloo Shrivastava and Diptarka Roy; editing by Ron Askew.

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