Europe’s Latest Cheap Credit Scheme Is Falling Flat Again

Draghi rubbing head
ECB President Mario Draghi is unlikely to be impressed. REUTERS/Stefan Wermuth

The European Central Bank lent €130 billion ($US162.17 billion) to banks in its latest cheap credit program in an attempt to get Europe’s stagnant economy moving again. 

The TLTRO figure (targeted long-term refinancing operation) is likely to be seen as a disappointment. Straight after pretty poor figures in September, analysts were expecting €175 billion to be extended by Frankfurt.

ECB vice president Benoit Coeure says the figure is “within the ECB’s and market estimates and expectations,” but that’s only because the increasingly grim outlook for Europe has pushed estimates so low — they fell to just €130 billion to €150 billion by the beginning of December.

The ECB wants to offer credit to banks in Europe, attached to conditions that they will turn it into loans for the private sector. 

Banks took up €82.6 billion ($US103.4 billion) in loans in the first round of lending this September. The higher the numbers, the more money that European financial institutions would most likely be lending out into the economy. 

If the figure is seen as low, financial markets may take that as a sign that the ECB will do more easing in the months ahead. A Bloomberg report earlier this month suggested that the central bank would go for a much more wide-ranging stimulus plan in January.

Here’s what Capital Economics has to say about the announcement:

Banks were entitled to borrow a total of €400bn at a fixed rate of just 0.15% in the September and December operations together and the total of €212.6bn falls a long way short of that. This is another worrying indication that banks do not intend to lend, either because of their own risk aversion or a lack of demand …

Crucially, the news surely confirms that the ECB will not achieve the intended €1 trillion expansion of its balance sheet using existing tools alone, so a full-blown QE programme, including sovereign bonds, will be required.

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