Economists and analysts have been swooning over a new series of ultra-cheap, ultra-long bank loans announced by the European Central Bank (ECB) last month, which they believe might just kickstart the region's fragile economy.
"It's massively positive," Erik Nielsen, global chief economist at UniCredit, told CNBC via email regarding the new breed of "credit-easing" tactics announced by ECB President Mario Draghi.
These targeted long-term refinancing operations, or TLTRO IIs, advance on a previous model announced by the central bank in 2011 and effectively give free money to the banks to lend to the real economy.
They're a series of four loans - conducted between June 2016 and March 2017 - and will have a fixed maturity of four years. The interest rate will start at nothing, but could become as low as the current deposit rate, which is currently -0.40 percent, if banks meet their loan targets. This means the banks will be receiving cash for borrowing from the central bank.
Banks will need to post collateral at the ECB but there's no penalty if they fail to meet their loan targets. All that will happen is that the loans will be priced at zero for four years.
Frederik Ducrozet, a euro zone economist with private Swiss-bank Pictet, called it "unconditional liquidity to banks at 0 percent cost, against collateral." He said in a note last month that he expects it to lower bank funding costs, mitigate the adverse consequences of negative rates, strengthen the ECB's forward guidance and improve the transmission of monetary policy.
Abhishek Singhania, a strategist at Deutsche Bank, added that the new LTROs "reduce the stigma" attached to their use compared to the previous model. "Banks are encouraged to extend credit to the real economy but are not penalized for not meeting their benchmark lending targets," he said in a note last month.
The region is still a long way off from the near 2 percent inflation target, but economists say it's encouraging that Draghi might finally be ignoring the strength of the euro. This comes ahead of another rate decision by the ECB on Thursday with investors looking for any further announcements or hints on future policy.
Many see a weak currency in the euro zone as "bad inflation" as it also increases import prices. Instead, they believe Draghi is concentrating on the nitty-gritty in the real economy and focusing primarily on getting cheap money to the real sector – companies and households.
The program also helps to alleviate problems caused by new regulations on liquidity ratios, according to UniCredit's Nielsen. He explained that banks from peripheral nations - like Italy and Spain - can currently only really lend to SMEs (small-to-medium sized businesses) and households with real interest rates of maybe 4 percent to 5 percent, which can squeeze out a lot of good investment opportunities.
However, this time around, the TLTRO IIs give banks cheap access to cash and therefore give SMEs access to cheaper medium-term financing.
"I predict a very substantial take-up at the first auction," he said in a note in march. "It'll help lower the overall term funding costs, which is great for margins, so you want to own financials – equities and credit – here."
This June, Nielsen predicts a "very substantial take-up" at the first auction, but adds that this will mainly be banks rolling over the old TLTROs into the new one which has better financing terms.
Ducrozet expects the take-up of all four TLTRO IIs to be over 500 billion euros ($568 billion), with 400 million euros rolled over from the first program. Deutsche Bank's Singhania estimates that total gross take-up could be in the range of 420 to 615 billion euros.
