Wednesday, 29 February 2012

ECB's new LTRO continues the reflation wave

The European banks decided to borrow 529 bn Euros from the ECB at 1% in three years. Not quite what I had expected (600 bn), But more than last time (489 bn). Good enough.

Looking at the euro-zone money supply data shows that these loans are not channelled into lending to companies or individuals outside the banking sector. In other words, the money is either placed on deposit in the (central) bank, used to buy risk-free assets (government bonds, pfff!) or loaned out to other companies in the financial sector, who then invest in securities.

Aggregating the ECB's lending activities with QE programs in Britain and Japan and the recent relaxation of the Chinese reserve requirements, the world's central banks - minus the U.S. Fed – have added up to EUR 2200 bn to the international banking system, much of it in 2012. The U.S. QE programme amounted to USD 2360 bn, about EUR 1750 bn. While the U.S. has stopped further supply, there is no sign that the other central banks are about to stop their programs, and today's ECB loans were another big step in that direction.

I find it interesting that this topic has largely been ignored by the headlines, while the US equivalent program received a lot of attention. But there is no doubt that the monetary stance remains highly accommodative, and thus strongly supportive of financial assets of any kind.

Some fear it will lead to inflation tomorrow. That will not happen. Especially not as long as the world has a huge overcapacity.

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