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-TLTRO ECB's First Choice In Event Of Sustained Slowdown
     LONDON (MNI) - The European Central Bank is looking at launching another
wave of cheap funding for banks to boost a eurozone economy which is beginning
to sag just as the central bank is set to end its asset purchase programme, ECB
sources said.
     While only a serious economic shock could prompt the ECB to change its
plans to cease its bond buying programme after December, officials are
sufficiently concerned to be considering other ways of stimulating the economy
should it head further south. 
     Options include launching a third round of targeted longer-term refinancing
operations, or TLTRO loans, and discussions will take place at the ECB's
December meeting, the sources said.
     Banks have also expressed concern to the ECB about repayments which will
come due on the second, EUR740 billion TLTRO programme, which ran from 2016-17.
Italian banks alone need to repay EUR250 billion to the ECB by between June 2020
and March 2021, according to Moody's Investors Service.
     "December is going to be a very important meeting, not just the end of
asset purchases and the new forecasts ... but the question now is what do we do
in 2019 and how do we deal with the TLTRO issues going forward," a source close
to the ECB Governing Council discussions said.
     The source added that a mention of TLTROs by the central bank's President
Mario Draghi at his October press conference was "very deliberate."
     One driver for considering cheap bank financing is the fear of possible
contagion if Italy's budget standoff with the European Union leads to a further
sell-off of Italian sovereign bonds, eroding that nation's banks' capital and
possibly causing losses to lenders in other countries such as France, the source
     The Italians are determined not to cut back their plans for a budget
deficit equivalent to 2.4% of GDP, even faced with the threat of an EU Excessive
Deficit Procedure or the prospect of continuing bond market attack, sources
close to the governing 5 Stars Movement and Lega parties told MNI.
     Instead, Rome is seeking changes to rules preventing state aid to banks, as
well as to the EU's Bank Recovery and Resolution Directive, a Lega source said.
     A Eurosystem source said that while a further TLTRO round was something to
consider, the ECB would be reluctant to be diverted from its current course,
with markets expecting an interest rate rise after the summer, around the time
Draghi is set to conclude his term.
     "I think it's too soon. Why? Because December will also be the last month
for QE. Put yourself in Draghi's shoes: why do it then? December will be the end
of QE. That's it," the second source said.
     But TLTRO would be the ECB's first option in the event of a sustained
slowdown, ahead of other possibilities including lengthening the duration of the
central bank's stock of bonds by using the proceeds of maturing securities to
buy longer-term paper, the same source added.
     "It's still early days for the committee to decide," the second source
said. "The first thing will be more TLTRO via banks, then it will be Operation
Twist through reinvestments, and then it will be not to raise interest rates in
the summer of next year, plus further QE. But let's see the glass as half-full
at the moment."
     A further source said that it was too early to say what the ECB will say
when it announces details of its reinvestment programme in December. 
     Another source, from the Euro System, said while some southern ECB members
were arguing in favour of a Twist-like operation to lengthen the bond
portfolio's duration, it may not be possible because of market saturation and
the source questioned whether there was any need at all for such an operation in
the euro area.
     Eurozone economic growth fell to 0.2% in the third quarter, its lowest
three-month rate in more than four years, as German car production struggled
with new emissions standards and as soaring Italian finance costs hit the
currency bloc's third-largest economy. A slowdown in China, facing U.S. tariffs,
is also weighing on European manufacturers.
--MNI London Bureau; +44208-865-3829; email:
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$E$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]