European banks essentially rejected the European Central Bank on Thursday by declining its offer of a fresh round of virtually interest-free money, calling into question the latest effort to jumpstart the struggling euro zone economy.
The ECB said Europe’s banks withdrew €82.6 billion ($106 billion ) from the central bank in the first step of President Mario Draghi’s new effort to inject as much as €1 trillion into the euro zone economy. The number was a major disappointment to investors, who had been expecting banks to take up about €150 billion according to a Bloomberg survey.
The low uptake is “a clear disappointment after Draghi had said the ECB was aiming to expand its balance sheet considerably,” according to Jan von Gerich, a strategist in Helsinki for Nordea bank. He added that the low uptake means the markets are now likely to pay much closer attention to December, when banks will have their next opportunity to draw funds from the ECB.
At stake for the ECB is the revival of the euro zone’s sagging economy and preventing a dangerous spiral of deflation – falling prices – across the currency bloc. Euro zone growth was flat in the second quarter of this year, and most economists expect the economy to grow by less than 1 percent over the whole of 2014. Inflation stood at an annual rate of 0.4 percent in August, dangerously close to zero and well below the ECB’s own target of close to 2 percent.
Germany has been skeptical that the plan will actually revive lending to the real economy, and its banks are unlikely to have been the main recipients of the ECB’s money. Most of the money was likely to be taken up by banks in the euro zone’s southern “periphery” of Spain, Italy, Greece and Portugal, which continue to struggle with low growth and high government debt.
“It remains uncertain whether the [ECB’s] long-term tender will result in more loans being handed out,” Michael Kemmer, head of the German banking association Bankenverband, told Handelsblatt.
Thursday’s announcement fulfilled a promise first made by ECB President Mario Draghi in June – and stepped up again in September – to do whatever he can to revive lending to European small businesses that have struggled to get loans from banks. Bank lending to the private sector has been falling every month since July 2012.
Mr. Draghi’s efforts have met some resistance in Germany in particular, where some have argued the Frankfurt-based central bank has overstepped its mandate. The ECB’s plan will be carried out through a series of programs that will either see the ECB give banks fresh loans, or actively purchase asset-backed securities and remove them from the balance sheets of banks. It is a massive project that the ECB hopes will convince markets it is serious about reviving the euro zone’s flagging economy.