MacroScope

The ECB keeps putting up the cash, but where’s the lending?

August 28, 2014

Draghi and TrichetFor the European Central Bank, a lot is riding on euro zone banks ramping up lending to the private sector. Unfortunately, after a very long time, lending still is not growing. It fell 1.6 percent on a year ago in July.

Struggling with a dangerously low inflation rate that is expected to dip even further to 0.3 percent in August, the ECB placed a big bet back in June that hundreds of billions of euros more in cash for banks in further liquidity auctions in October and December this year would help turn the situation around.

The catch: instead of no strings attached, as its policy was in the past for allowing banks access to cheap money, these long-term refinancing operations (LTROs) will require banks to set aside some money to lend to the private sector. So these ones are targeted, hence why the ECB calls them TLTROs.

Private lending growth, the ECB says, will help bring inflation back up from near zero to the 2 percent target.

But as the chart below shows, the ECB has its work cut out for it.

It is well-documented that much of the past LTRO cash – over one trillion euros in two auctions alone during the depths of the sovereign debt crisis – found its way into the stock market as well as euro zone government bonds.

But it did not find its way into the accounts of euro zone businesses in need of funding.

Perhaps its TLTROs might work, although many analysts and money market traders polled by Reuters say they probably won’t.

If they don’t, well, that is probably why ECB President Mario Draghi has made a 180-degree turn both on his approach to fiscal stimulus and his plans to conduct outright bond purchases.

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