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LTRO: Why the ECB should make every day Christmas

Banks in the eurozone periphery have need, and some justification, for a new targeted LTRO.

Recent discussion on whether the European Central Bank should extend its long-term refinancing operations (LTRO) in 2019 has revolved largely around which banks should be able to use it.

Last time, LTRO targeted banks contributing to the economy. This time, some of its proponents are arguing it should be restricted to banks that have acted on non-performing loans.

This would be a good bone to throw to the inevitable northern European detractors of extending the programme. After all, it is not Christmas every day. Why should the ECB prop up banks that do nothing to help themselves?

In reality, it would be difficult to push banks that have not done enough towards failure. The banking sector is obviously not behind the push by Italy’s Five Star Movement or Greece’s Syriza for greater freedom from austerity measures.

In any case, most banks that use LTRO will be able to find some evidence that they have acted on non-performing loans, even if Italian banks – by far the biggest users of the targeted LTRO (TLTRO) programme – could and perhaps should have done much more to bolster their balance sheets in better times. This is particularly true of the mid-tier lenders.

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