The ECB and its TLTROS ..... and Aramco's spectacular bond sale.

Increasing supply without increasing demand is a bit like pushing on a rope .... not very effective.

ref :- "ECB loans fail to ignite bank lending" , The Financial Times, Markets and Investing

It's another decision day for the European Central Bank today .... don't expect any changes to headline policy but DO expect plenty of rhetoric about the increased risks to the Eurozone economy. With such a list of dark clouds to consider -- Brexit, Trump escalating trade disputes, Italy in recession, German manufacturing in something of a slump and the IMF slashing global growth forecasts -- it would be amazing if the tone was anything other than sombre. It was already pretty sombre last month, when with its options limited by below-zero rates and a commitment to no more quantitative easing, the ECB's response to bleaker forecasts was to announce a further round of TLTROs.

September will see the third tranche of TLTROs (Targeted Long Term Refinancing Operations) after previous rounds in 2014 and 2016. They are effectively super-cheap lending offered to commercial banks by the central bank, providing them at times of stress with the ability to pass on loans to businesses and households. Taking into account that many of the loans established by TLTRO 2 are soon to mature and that the Eurozone's growth rate has halved over the past year to just over 1%, few would argue that more help is unnecessary. The trouble is that the evidence suggests that it's just not working too well.

The ECB's latest quarterly lending survey shows that regardless of the ultra-low rates on offer the appetite for debt from businesses in particular is fading, with growth in loans to that sector falling to exactly 0% from 9% the previous quarter. In Italy and Spain, by percentage of GDP the largest borrowers under the TLTRO scheme, loan demand is shrinking.

Perhaps it's a confidence thing .... however generous the terms, you can't force people to borrow from you if the economic environment is making them unwilling to saddle themselves with long-term debt. And there's also a belief that rather than passing on cheap funding to customers, some banks have not been averse to using it to buy government bonds on their own behalf when yields have been attractive enough. Either way, the stimulus is not really getting through.

The terms of the third round will probably be announced in June, but as early as today we might hear something from the ECB as to how they might tweak these targeted loans to make them more effectively ..... well, targeted. Without that, and without some thought as to how they might goose the demand side to match the increased supply, it's hard to see the new TLTROs giving a big boost to lending.

Judge them by their actions , not by their words .... investors pile into Aramco.

ref :- Everywhere

Just a quick thought ..... Looking at it from one angle, Saudi Arabia's giant oil operation Aramco's debut on the debt markets can be judged as something of a triumph. The sale of $12bn over a spread of maturities (upped from $10bn due to demand) was met by over $100bn in buy orders. Such an over-subscription meant that the oil conglomerate was able to sell its debt at a lower yield than equivalent Saudi sovereign paper, and in fact, the whole Saudi yield curve moved lower as a result.

It's not as if Aramco needs the money .... you can't issue bonds without opening your books (a bit, anyway), and those told us that Aramco is awash with cash and dwarfs all other corporates. This was mainly an exercise aimed at furthering Mohammed bin Salman's plans to get Saudi Arabia accepted by the global financial community and by extension to modernise his oil-dependent nation. In that, and after the decision not to float part of Aramco, it has been a great success.

But isn't it funny ? Not very long ago, many of the world's leading players in the investment industry were pulling out of MBS' Riyadh conference in righteous indignation after the Kashoggi killing in Saudi's embassy in Istanbul. And yet some of those same people have been leading the sales pitch for Aramco's issue on the pre-sale roadshow.

The great reception it received doesn't say anything good or bad about Aramco or Saudi Arabia particularly, but it does remind us of a general and slightly awkward truth about the world of global finance. With apologies to high-minded exceptions, but one should always reach for a handful of salt when you see financiers assuming the moral high ground. Yes, it's attractive for them to be seen taking an ethically-upstanding position, but not half as attractive as a good slice of rock-solid high yield.

The world has not yet changed as much as some would like to think. It would be overly cynical of course, but those of a mischievous bent might be reminded (not for the first time) of Ralph Waldo Emerson's observation about a dinner guest :

"The more he talked of his honour, the faster we counted the spoons" .....

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