Draghi cash offer seen losing luster as euro area risks increase

By Alessandro Speciale, Jana Randow & Joshua Robinson

Mario Draghi’s promise of cheap cash for banks betting on the euro-area revival is losing its allure.

Economists in the Bloomberg Monthly Survey cut their estimate of the take-up of funds under a program designed to boost bank lending. The reduction signals concern that the outlook for the currency bloc may be too weak to drive demand for loans, undermining a policy the European Central Bank president says is key to restoring the region’s health.

An escalating standoff with Russia threatens to worsen the prospects for the 18-nation euro area, where growth has already ground to a halt and inflation is running at the weakest pace in almost five years. That’s increasing pressure on the ECB to step up stimulus with radical tools such as quantitative easing to avert the risk of deflation and renewed recession.

“The next step is to see how big the demand is for liquidity,” said Peter Dixon, an analyst at Commerzbank AG in London. “If it falls well short of expectations then that’s the point at which the ECB may need to think again and start to bring the QE debate back to the table.”

Analysts estimate that banks will borrow 650 billion euros ($870 billion) in the targeted longer-term refinancing operations, or TLTROs. That’s down from 710 billion euros estimated in last month’s survey.

‘Very Attractive’

Draghi said in July that the maximum size of the program could be about 1 trillion euros. On Aug. 7, he said market estimates and indications by individual banks point to a take-up of between 450 billion euros and 850 billion euros.

Lenders can apply for funds from the ECB at 10 basis points above the benchmark interest rate, which was cut to a record-low...