The first LTRO was announced in December 2011 followed by the second one in March 2012. The objective was to supply liquidity to our banks in exchange for guarantee taken to the ECB, given that the north European banks no longer trusted peripheral banks and no longer lent them money. In theory, this should have made it possible to finance the real economy: I, the ECB, am loaning you money in exchange for guarantees so that you can pass on the money in the form of loans to the SMEs and the families.

The whole spiel about "lending to the real economy" has never been true. It's possible that the ECBankers actually believe it, but it doesn't make it true. The goal of the ECB liquidity provision, and of governments' recapitalizations of banks is to prevent the banks from collapsing and taking chunks of the economy with them. But banks don't lend central bank or treasury "high-powered money", so all of this "enabling credit to the real economy" is nonsense.

In reality the real economy has seen very little of the 250 billion of LTRO money that the Italian banks got from Draghi. In fact they have reinvested nearly all that money in BTP that are giving a yield of 4.5% after having taken the ECB loan at an interest rate of 0.5%. That's roughly 10 billion in profits each year for the Italian banks in exchange for allowing the State to place its debt.

I may be wrong about this, but the LTRO is not free money for the banks, it's actually a net cost for them. Let's see if this makes sense:

The ECB always lends money to banks against collateral. In fact, the loans are always overcollateralised. The €250bn that the ECB loaned to the Italian banks was in exchange for, say, €265bn (maybe more) in illiquid assets. In addition to paying 1% (that's what the rate was at the time of the LTROs, not 0.50%) to the ECB for the loan, they forego the interest income on the asset they pledge as collateral (5% or more on average). If they buy government bonds, lending to the Italian treasury at 4.5% interest, and then they pledge the assets as collateral to the ECB, they not only forego the 4.5% interest but they must pay the additional 1% (lately, 0.50%). And they get less cash for the pledged collateral than they loaned to the Italian state.

So I don't see the free lunch for the banks anywhere. The banks are paying a real cost in exchange for much-needed liquidity. The ECB is taking in illiquid assets in exchange for cash, which is a net benefit for the banks in today's liquidity squeeze, and for which the banks are willing to pay.

In the Neurozone, there can be only one.