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CURRENCY ANALYSIS

EUR/CHF: A Different Approach?

EURCHF, Different Approach, ECB, Governing Board, Currency Analysis, fx trader, forex

16 Mar 2016

At first markets seemed not to know what to make of the ECB 10 March policy decision. The ECB Governing Board decided that the main refinancing Eurozone rates would be decreased by 5 basis points to 0.00%; a 5 basis point reduction of the marginal lending facility to 0.25%; a banner headline 10 basis point reduction on the deposit facility rate to -0.40% and a €20 billion increase in asset purchases to €80 billion, expanded include non-bank investment grade Euro denominated bonds. The last listed action did not light up headlines although it does give pause for thought: “...A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility...

The new facility1 discounts repurchase operations further, but not entirely. Still, it amounts to a lowering of refinancing operations without explicitly stating so. “... Counterparties will be able to borrow in the operations a total amount of up to 30% of a specific eligible part of their loans...” This ‘specific eligible part’ up to 30% is quite a substantial increase over the first TLTRO2 announced in July of 2014. It should be noted that under the first iteration of TLTRO, “...banks will initially be able to borrow an amount equivalent to up to 7% of a specific part of their loans...”

Also, the term ‘counterparties’ has significance: “...counterparties can participate in TLTRO II individually or, subject to certain conditions, on a group basis. In the latter case, the calculation of the TLTRO II group’s benchmark and borrowing allowances will be based on aggregated loan data for the TLTRO II group...”  Further, the eligible loans are defined as “...defined as those to euro area non-financial corporations and households excluding loans to households for house purchase...”

The original facility was specifically intended to support the transmission system of low interest loans to the real economy: “...Banks can participate in a TLTRO individually. In addition, several banks may form a “TLTRO group”, if they fulfil specific conditions, and can then participate in a TLTRO through one member of the group...”

Hence, the TLTRO-I seemed to be designed to support liquidity injection while TLTRO-II seems to support the refinancing of non-performing loans, specifically those outstanding non-financial corporations and households, (excluding home loans). This begs two questions: first, what non-financial corporations? Might this be energy related? Or might this be referring to ‘off balance sheet assets’? Second, what type of household loans excluding those for a house purchase? This is rather vague. It seems to be excluding support for new mortgages. However, many CEE-EU member state economies have been weighted down by older foreign loans, mainly from Switzerland but also from the Eurozone, for example, Euro denominated mortgages.   The point of the matter is that the ECB seems to be targeting poor or non-performing assets weighing down the Eurozone private banking system.

The duration of this new facility “...will have a maturity of four years from their settlement date...” The duration of the new facility loans appears to be double that of the original facility duration, which was 2 years.

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