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Eurozone Trade Balance Rises

James Boston
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Eurozone Trade Balance Rises

The Eurozone’s economic statistics agency, Eurostat, has just published the July trade figures for the single currency area. The overall Trade Balance has been announced as €21.2Bn on a non seasonally adjusted basis, this is an improvement on the June final of €16.8Bn and compares to a market consensus estimate of €19.5Bn. When seasonally adjusted the July Trade Balance for the Eurozone comes in at €12.2Bn, up from June’s €13.8Bn reading.

There is likely to be some nerves around the European Central Bank (ECB) this week as they prepare for the launch of the large scale Targeted Long Term Refinance Operation (TLTRO) on Thursday. This policy, announced in June, is aimed at increasing liquidity across the zone by way of facilitating banks to lend directly to business and consumers. Banks can apply for cheap funding equivalent to up to 7% of their qualifying loan books, which given the stipulation that the funds are for non mortgage use and exclude financial intermediaries, should come in at approximately €400Bn. Further tranches will be made available based on the increase in bank lending to qualifying sectors.

The package is generous and holds a lot of potential to create an economic activity stimulus. There are however two concerns that the ECB holds around the successful implementation of the scheme. Firstly, the funding is very cheap, it is the ECB’s Refi rate plus 10bps, this may see banks draw down their qualifying allotment and not pass it onto customers, the excuse that there are limited secure lending opportunities would give banks the opportunity to hoard the cash and instead earn interest income from treasury assets. The second concern that the ECB will have this week is almost the opposite to the first, it is that banks simply do not draw down their qualifying allotment, this would lead to a perceived failure of the scheme and limit the ECB’s options for creating liquidity in the system.

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