Since Tuesday (16 September) European banks have been invited to bid for a new batch of long-term loans which are hoped to encourage lending to businesses, thus kicking off the euro zone economy. The initiative is an important pillar of the efforts by the European Central Bank (ECB) to protect the euro zone economy from deflationary pressures by reinvigorating economic growth. Eurozone inflation is currently at 0.3 percent, well below the ECB official target of 2 percent.
The new funds will be cheap three-year long-term loans, called targeted longer-term refinancing operations (TLTROs), which will offer financial institutions funding at interest rates close to zero but will be mostly tied to lending to small and mid-sized enterprises widely seen as the crux of the European economy. Economists are currently rather skeptical about the potential of the initiative to really boost lending. According to Fabio Ianno of Fitch Ratings, it does not really matter how much extra liquidity banks will get, because they will still not start lending more. According to the ratings agency, the reason behind the banks’ reluctance to lend more is twofold – the fragile situation of many firms in Europe’s periphery countries along with subdued demand.
ECB President Mario Draghi previously emphasized that he believed in the new asset-purchasing initiative to gradually boost the ECB’s balance sheet, which would free up the flow of credit and thus boost the economy. Mr Draghi’s vision is to get the balance sheet back to its “volume” at the beginning of 2012, when the sheet was about a trillion euro bigger than its current size. TLTROs have officially started this week. Banks can now borrow as much as 400 billion euros at tenders at a small premium to the ECB’s regular funding operations. The program may get extended to mid-2016 with extra loans.