The central bank for the 18-country eurozone on Thursday handed out 82.6 billion euros ($107 billion) in ultra-low interest loans to 255 banks.
Demand undershot even the low end of expectations. Analyst estimates had varied, from around 100 billion euros to over 200 billion euros.
The idea is to have banks use the easy money to lend more to companies. Banks pay only 0.15 per cent annual interest for up to four years for the loans. Crucially, the amount they can borrow is tied to how much they lend. That condition is intended to make sure the money gets into the economy and creates jobs. Banks had used previous such offerings to load up on government bonds instead.
The low uptake underlined the ECB's difficulty in getting its stimulus measure through to the economy. Many economists think the impact of the cheap loans — dubbed targeted longer-term refinancing operations, or TLTROs, pronounced "TELL-troes" — will have limited impact because companies see no reason to risk borrowing in such a slack economy.
Thursday's offering of the cheap loans is the first of eight in a program unveiled June 4. Together with further stimulus measures announced Sept. 4, they are part of a broader ECB effort to expand the amount of credit available in the economy.
Slack growth and low inflation of only 0.4 per cent have raised fears that the eurozone's recovery from a crisis over high government debt is stalling. The eurozone economy didn't grow at all in the second quarter, after four quarters of unsatisfying expansion, while unemployment is at 11.5 per cent. Economists expect growth to resume, but have cut their estimates.
Under the latest measures unveiled Sept. 4, the ECB plans to purchase bonds based on bank loans to companies — a step that in theory encourages banks to make more such loans.
ECB President Mario Draghi hopes the bond purchases together with the TLTROs will add 1 trillion euros to the total amount of stimulus. The bank's balance sheet — a measure of the total size of its efforts to add money and credit to the economy — has been slowly shrinking as banks repaid earlier rounds of cheap loans. Those repayments mean the ECB is in fact reducing monetary support at a time when the recovery is uncertain. The TLTROs and bond purchases are aimed at reversing that.
Weak use of the TLTROs would make it harder to achieve the total level of stimulus the ECB wants. That could increase the likelihood of more drastic steps, such as the purchase of large amounts of government bonds, so-called quantitative easing, or QE. QE would pump large amounts of newly created money into the financial system in an attempt to lift inflation and growth.
Analyst Holger Schmieding at Berenberg Bank called Thursday's result "disappointing."
"The result shows that a lack of liquidity is not among the top problems in the eurozone," he wrote in a note to investors.
He said Europe's problem is not banks lacking cash but uncertainty that depresses business owners' demand for loans. Fear about a possible escalation of the conflict between Russia and Ukraine is weighing on business decisions, he said.
Banks are also holding back ahead of the publication of a review of their finances by the ECB, which could require them to use money to strengthen their capital buffers instead of make loans.
Analyst Tom Rogers, senior advisor to the EY eurozone forecast, said the numbers "look less impressive than the market had been expecting" but said banks might be waiting until the ECB review is released before taking advantage. The next round of loans will be made in December.