Eurozone’s Targeted Longer-Term Refinancing Operations Theater

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New 50 Euro banknote during a presentation by the German Central Bank in Frankfurt in 2017. (Kai Pfaffenbach/Reuters)

If a dysfunctional currency union could be saved by ungainly groupings of letters the euro zone would be by now in rude health.

One of those groupings that has been around for a while now is the TLTRO. The European Central Bank (ECB) describes TLTROs as follows:

The targeted longer-term refinancing operations (TLTROs) are Eurosystem operations that provide financing to credit institutions. By offering banks long-term funding at attractive conditions they preserve favourable borrowing conditions for banks and stimulate bank lending to the real economy.

The TLTROs, therefore, reinforce the ECB’s current accommodative monetary policy stance and strengthen the transmission of monetary policy by further incentivising bank lending to the real economy.. .

The TLTROs are targeted operations, as the amount that banks can borrow is linked to their loans to non-financial corporations and households.

In TLTRO III, similarly to TLTRO II, the interest rate to be applied is linked to the participating banks’ lending patterns. The more loans participating banks issue to non-financial corporations and households (except loans to households for house purchases), the more attractive the interest rate on their TLTRO III borrowings becomes.

Sounds good? Well, as plans to keep a disastrous experiment in central planning (the euro zone) going go, it is not the worst — in theory. But over at Bloomberg, John Authers quotes this extract from a piece by Charles Gave of Gavekal Economics:

None of last week’s €1.31trn will go into corporate loans. Every cent will go into funny-money strategies with one goal and one goal only: to reduce the spreads between Italian and German debt, and so lower the cost of capital for Italy.

Put simply, the ECB is attempting to shore up the eurozone’s banks by subsidizing them to buy Italian bonds and sell German bonds. The objective, once again, is to save the euro.

But although the banks may rebuild a part of their capital base with strategies like the one I have just described, they will lose a lot more on all the bad loans which are going to emerge in Southern Europe, especially after a summer without tourists. That €1.31trn may spin around in the financial markets with colossal velocity, but the small hotel in Rome will see none of it, as usual.

And that will be a problem. Saving the banks while killing the economy will not go down well with European electorates, who for years now have had the distinct impression that, among the institutions of the European Union, banks are regarded as far more important than citizens. It’s as sure-fire a recipe as any I can think of for the resurgence of Euroskeptic populism.

There is a lot to this analysis, I suspect, but it should not be forgotten that what is really killing Italy’s economy, Italy’s banks, and Italy’s public finances are the consequences of Italy’s decision to cheat its way into the euro, a currency for which it — as at least some of those putting together the single currency knew — was never suited.

Italy wasn’t suited to the one-size-fits-all euro then, and Italy is not suited to the one-size-fits-all euro now. The least bad way out of this mess remains, as it always has been, the division of the single currency into ‘northern’ and ‘southern’ units.

But the chance of that happening is — again, as it always has been — close to zero, and the long euro-zone crisis — sometimes chronic, sometimes acute — will drag on and on and on.





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