One of the most successful measures taken by the European Central Bank (ECB) in an economic crisis was the LTROs (Long-Term Refinancing Operations). Throughout the years, they worked as intended and provided liquidity in the aftermath of the 2008-2009 Great Financial Crisis and the subsequent Eurozone sovereign debt crises in 2012.
Throughout time, the LTROs took different forms and shapes. In response to the economic shock created by the COVID-19 crisis, the ECB put at commercial banks disposal a program called TLTRO-III. The first letter stands for “targeted,” and the program is the third version of similar programs the ECB ran in the past.
Massive Demand for Cheap Money from the ECB
The last round of the ECB TLTROs was a massive success. Judging by how much the banks took, one assumes the ECB did a good job providing liquidity in uncertain times. This is the largest refinancing operation ever conducted by the ECB as the €1.3 trillion taken by the banks results in a net injection of about €500 billion.
From an economic perspective, this is a huge success. By lowering the conditions to the new program, the ECB gave banks access to cheap money to strengthen their balance sheet and to provide loans to businesses and the population.
Not surprisingly, banks located in the countries hit the hardest in the health crisis, took as much as they were allowed to – Italy and Spain lead the race.
However, the message is not about the size and success of the program – but about the signal it sends. Effectively, it puts the ECB on the front seat of central banking proactive attitude, outpacing the easing that takes place in the United States. As a matter of fact, the USD liquidity shrank last week, and the Fed’s balance sheet did so in response.
For traders, the period ahead is confusing for at least a couple of reasons. On the one hand, the success of the program puts a strong backstop behind the Euro and the ECB’s credibility. Sometimes, this is more than enough for investors looking to differentiate between various fiat currencies.
On the other hand, this is a pure liquidity injection measure. While alleviating current economic problems, the net result is more Euros circulating within the same system. More precisely, when the money supply increases, the value of a fiat currency declines.
With summer trading already here, traders may have to wait until the fall to see the real effect of the ECB’s TLTRO program.