-Marco Valli, chief eurozone economist at UniCredit
Last week Mario Draghi announced a big policy step– he implemented a negative interest rate on the central bank's overnight deposit account– a move largely priced in by markets. However, he also made the most substantive policy move since July 2012. The President pledged to inject around 400 billion euros of cheap loans that will be available under a programme of targeted long-term refinancing operations, or the TLTRO. Since the beginning of 2014 European banks have been increasingly eager to back their LTRO loans to avoid dependence on cheap central bank's financing and avoid scrutiny by the region's watchdogs. Currently, there is just 453 billion euros left or the 45% of the original total outstanding. This resulted in a drop in excess liquidity in the financial system, and pushed the Euro higher and added to deflationary pressure in the currency bloc. However, the effectiveness of a new round of LTROs is under the question, as the first round was launched to deal with the funding crisis for European banks, and indeed, the measure helped to change the circumstances. However, there is no funding crisis now in the region. The fact private banks will have to increase lending to the real economy will act as a disincentive for them to take it, and they will be deleveraging instead. The ECB sees a lot of advantages in new LTROs. They will provide four-year liquidity, while previous are already moving to the maturity. Banks will be charged 25 basis points per year, and it seems it will be the key to attract banks' interest.
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