The European Central Bank doled out 82.6 billion euros ($106 billion) in cheap loans to banks Thursday and announced a new voting system that raises the prospects for quantitative easing to boost the euro zone's lagging economy.
The loan allocation was the first of eight targeted longer-term refinancing operations (TLTROs)—a new cheap loan scheme aimed at boosting bank lending to the nonfinancial sector.
TLTROs allow banks to borrow money at the low rate of 0.15 percent—or 10 basis points on top of the main refinancing rate of 0.05 percent. The idea behind the plan is that, flush with these new low-interest funds, banks will boost lending to the nonfinancial businesses and help boost the currency union's economy. However, it is unclear if any penalties will be enforced if banks do not pass on the loans to households and businesses.
Around 400 billion euros ($518 billion) should be available overall and must be repaid by the middle of 2016. Analysts said acceptance of the loans was lower than expected, with 255 banks participating. Traders polled by Reuters had forecast that banks would take up 133 billion euros worth of loans.
The amount that banks can borrow is proportional to their current loan book, and there will be another chance for banks to apply for TLTROs in December. A second phase of TLTROs will start in March and run through the middle of 2016.
However, there are fears that the ECB will have to introduce further measures to help kickstart the euro zone's stumbling economy. In the second quarter, the zone's gross domestic product grew by 0.2 percent, compared with 2.5 percent in the U.S., inflation is only 0.3 percent and unemployment is stuck at 11.5 percent.
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"If banks continue to refuse to take the cheap cash on offer in December, then it may force [ECB President Mario] Draghi into full blown-QE where he buys government debt (and not just asset backed securities)," Louise Cooper of Cooper City said in a research note.
The euro traded slightly higher after the announcement at $1.2876.
Rotation
Earlier in the day, the ECB released details of a new voting rotation system for its Governing Council. The change means that Jens Weidmann, the governor of the German Bundesbank, will sit out the council meetings in May and October next year.
Weidmann has traditionally been critical of ECB aggressive stimulus measures, so his prospective absence increased market speculation the ECB might yet launch a QE program as early as May. European markets surged on the possibility.
Draghi has previously hinted that QE could yet be used to combat prolonged low inflation. However, Germany has been resistant, due to concerns that bond-buying could over-stoke inflation.
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The governors of all euro zone central banks will continue to participate in the Governing Council but will no longer be able to vote at every policy-making meeting.
The new rotation system is designed to keep decision-making efficient as the number of euro zone countries expands. It will start in January, when Lithuania becomes the 19th country to use the euro.
The rotation of voting rights involves creating two groups of countries, depending on the size of their economies. The governors in each group take turns holding voting rights.
Correction: An earlier version provided an incorrect figure for the amount of money allotted. The correct figure is 82.6 billion euros.