The end of free money

3rd April 2017

Daniel Pfund, Senior Financial Analyst, Fund Manager

In September 2014 the European Central bank (ECB) launched its first program offering long-term loans to banks, called TLTRO (Targeted Long Term Refinancing Operation). These loans have a maturity of maximum 4 years and their cost is zero percent.

At the beginning the aim of TLTRO was to help relaunch the economy. Thanks to this free money, the commercial banks were supposed to increase their loans to companies, who in turn were supposed to stimulate the economy by investing this capital in the production of goods and so creating new employments. Unfortunately, since 2014, the loans to companies increased only by 0.42%. The companies did not need the money as the demand was never present. Some companies took the opportunity to borrow money at historic low rates, but mainly to buy-back their own shares and not to invest in their production capacity.

Last Thursday the ECB closed the TLTRO program. The banks borrowed for the last time 233.5 billion Euros, a record amount. With the end of this program, the ECB signals to the economy that times of free money are in the past. The ECB will most certainly raise the reference rates before the end of the year.