WHAT IS THE ECB DOING?
Q.What is the LTRO?
A.The ECB is offering long-term cash to Eurozone banks, letting them borrow money at one per cent for three years – a long-term refinancing operation, or LTRO. The idea is to flood banks with cash so that they do not have to restrict lending because of liquidity worries.
Q.What will that do?
A. The idea is to stop banks worrying about cash flow so that they can lend instead. That might mean buying government bonds (lowering yields) or it could mean lending to companies or consumers, fuelling growth. In December, a huge €489bn was borrowed and the ECB expects roughly the same demand at the end of February.
Q.Is the ECb not taking risks by making these loans?
A.There is a chance that not all the banks will be able to pay back the money. However, the ECB will only lend to banks if they offer assets as collateral, so the ECB has something it can sell instead. This also allows banks to park unwanted assets at the Bank rather than taking an immediate write-down on them.