MNI SOURCES: Bundesbank Proposes ECB Pandemic LTRO Loans

     LONDON (MNI) - The Bundesbank has proposed "pandemic" longer-term

refinancing operations to provide an additional source of cheap loans for banks,

several sources told MNI ahead of Thursday's monetary policy meeting of the

European Central Bank's Governing Council.

     Germany's central bank suggested "pandemic LTROs" very recently, a source

familiar with the workings of the Governing Council told MNI, with other ECB

officials confirming the move.

     "The intention is to do something in favour of small banks, but very likely

to counteract other proposals as well," the first source explained, adding that

the Bundesbank's suggestion was for the loans to be provided at the ECB's

deposit rate without additional restrictions.

     --PROPOSAL COMES AS ECB SEEKS PURCHASING LEEWAY

     The Bundesbank proposal was made as other officials within the ECB call for

more leeway on the central bank's asset purchasing programmes, the first source

said, without providing more detail. Thursday's meeting comes amid speculation

that the Governing Council could eventually agree to buy junk bonds as part of

its QE portfolio.

     "It's in the spirit of 'loans, not grants,'" another ECB source said, while

another told MNI that they had heard that the Bundesbank proposal had been

brought up in meetings.

     "In any case, if we see that banks aren't able to extend additional credit

and need help anyway, that could be discussed," one of the other officials said.

     The Governing Council was already expected to announce on Thursday an

extension of weekly exceptional LTROs beyond June.

     Another source said it was more likely the ECB would do more to provide

targeted longer-term refinancing operations, whose funds are tied to specific

uses in the economy, than LTROs. But the official, who could not comment on any

Bundesbank proposal, said they would not be surprised if Germany were to seek

pandemic LTROs or TLTROs.

     --COMPANIES NEEDING RESCUE

     "They've got a lot of things on their plate to handle, a lot of major

strategic national companies to rescue," the official said.

     Pandemic TLTROs would potentially be the "next natural step" for the ECB,

said the fourth source, adding that avoiding a credit crunch and ensuring smooth

transmission of monetary policy "are paramount as the crisis deepens and

protracts."

     "We could expand liquidity supply and the availability of new TLTROs to

tackle the prolonged economic freeze of firms."

     Further ECB action had been made "all the more crucial," the official

added, in light of the "disappointing" EU response to the crisis thus far. A

commitment to set up a European Recovery Fund was a step forward but would take

a long time to implement.

     "If we have to wait one or two years for those funds, bonds or whatever to

fully kick in, European businesses will be all dead by then," the source said.

     Spokespeople for both the ECB and the Bundesbank declined to comment to

MNI.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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