ECB to offer a new LTRO, just not now

TLTRO II created a wall of liquidity that allowed banks to borrow hundreds of billions of central banks liquidity from the ECB. While i ) TLTRO II first series come due in more than a year and ii) early redemptions come with a trade-off for many banks, there is without any doubt a liquidity issue which will materialize one way or another. As such, we expect the ECB to announce a new long-term refinancing operation at its June meeting, with the actual offer to take place in September. The new refinancing operation is likely to be less “generous”, allowing banks only to roll existing TLTRO II loans, with a maturity of only two years and an interest rate fixed to the ECB’s MRO rate . Negative investor reaction to announcement cannot be ruled out . In addition to the keener risk appetite, one can wager that BTP and financials have appreciated in anticipation of announcements by the ECB. One cannot rule out the risk of disappointment in response to ECB announcements given: i ) t he belated launch of the new refinancing operation ; ii) e specially, the particularly limited nature of the operation that we envisage (LTRO III restricted to one 2-year operation), bearing in mind the market consensus is for an earlier launch (in June), for a lengthy series (three to four operations) and, at a more distant maturity ; iii) t his will be a roll, no t a fully-fledged operation coming on top of existing TLTRO II funding obtained by European banks.