The LTRO, more ECB can-kicking
Quick BackgroundThe ECB offered "unlimited" cheap (1%!) 3 year loans to the Euro banks, accepting as collateral, well, anything (as long as it is A- or better. The plan is that
Results
From FT Alphaville, reporting that the LTRO was 489.19B Euro
Translation
The banks in the Euro parked all thetoilet-paper bonds that they could lay their hands on at the ECB.
Opinion
The #euromess can has been - (kinda, sorta, possibly) kicked down the road for, at the most, 3 years (remember that these are 3 year loans.
To be precise, part of the #euromess - relating to the liquidity of the banks - has been kicked down the road 3 years. This, however, is creating a much bigger problem 3 years down the road, since now all the banks borrowings from the ECB are going to come due in 3 years. For an analogy, imagine that you rounded up all the criminals in all the prisons in the US (ok, thats almost 3 million, or 0.75% of the population!), put them in one giga-prison, and said they were all going to be released at the same time in 3 years. Not such a great idea, eh?
At least the banks get their liquidity, right? Do you think they are going to use this liquidity to make loans? If you do, I own this spectacular bridge just down the road from me that I'm willing to sell on excellent terms.
Cynicism - fueled by TARP where the banks simply paid out this windfall as profits - aside, the main problem is that the banks need this extra money to beef up their liquidity, and simply can't lend this out.
- The banks park all their
toilet-paper bonds at the ECB, and get a ton of money from it - This money is used to provide the banks liquidity - which they are desperately short of
- They use this money to make loans, thus preventing The Great Depression II
- They also use this mechanism to buy up sovereign debt and park that at the bank (the Carry Trade is back! w00t!), thus reducing the borrowing costs of the countries.
Results
From FT Alphaville, reporting that the LTRO was 489.19B Euro
€489.19bn is definitely at the top end of analyst expectations, and proves that appetite for funding as well as carry-trades (we presume) is extremely high.That, or there’s simply a lot of low-quality collateral out there which banks feel more comfortable transforming into liquidity via ECB funding operations.
Translation
The banks in the Euro parked all the
Opinion
The #euromess can has been - (kinda, sorta, possibly) kicked down the road for, at the most, 3 years (remember that these are 3 year loans.
To be precise, part of the #euromess - relating to the liquidity of the banks - has been kicked down the road 3 years. This, however, is creating a much bigger problem 3 years down the road, since now all the banks borrowings from the ECB are going to come due in 3 years. For an analogy, imagine that you rounded up all the criminals in all the prisons in the US (ok, thats almost 3 million, or 0.75% of the population!), put them in one giga-prison, and said they were all going to be released at the same time in 3 years. Not such a great idea, eh?
Cynicism - fueled by TARP where the banks simply paid out this windfall as profits - aside, the main problem is that the banks need this extra money to beef up their liquidity, and simply can't lend this out.
What about the Carry Trade, where the banks buy sovereign bonds in the primary market, and then park it at the ECB? Results from Tuesday where Spain sold 5.64 Euro of 3 and 6 month bonds at low low low rates (1.75% to 2.5%, compared to 5% earlier) seem promising, but
- they were very short term, and Spain doesnt have any major bond sales till much later in the year
- the banks could very well have been loading up on toilet-paper bonds in preparation for the LTRO
Evidence for this is that in the early hours, Italian bond yields actually have gone up, since pretty much everyone knows that the Next Big Problem is the huge (hundreds of billions) amount of bonds that Italy needs to rollover Very Soon.
The last problem here is that the banks are also parking only their toilet-paper (no strikethrough!) at the ECB, keeping their quality collateral for themselves, thus seriously upsetting the market, since there Just Isn't That Much Quality Collateral
As Isabella Kaminska put it in FT Alphaville
The last problem here is that the banks are also parking only their toilet-paper (no strikethrough!) at the ECB, keeping their quality collateral for themselves, thus seriously upsetting the market, since there Just Isn't That Much Quality Collateral
As Isabella Kaminska put it in FT Alphaville
Another way of looking at it is to understand that the decision to replace private funding through central bank liquidity has only encouraged trashy collateral dumping in central banks — and heightened the divide between private markets and public markets.The two are running increasingly off course. Unless central banks act collectively to re-establish control of quality collateral markets, no matter how much liquidity they provide against trashy collateral — it won’t make much of a difference.Private markets must be convinced to lend unsecured or invest money in more than just the last few remaining AAA bond markets.But as they say, you can lead a horse to liquidity but you can’t make it drink. Which is a shame, because that’s the main problem the ECB and other central banks are now facing: they are leading banks to liquidity but they can’t make them lend in private markets.
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