On 8 December ECB announced a new 3-year financing facility.
It is UNLIMITED, and with a suitable weakening of the quality of the collateral
for the loans, it could end up being a major game changer.
The LTRO will make possible a simple idea to recapitalise
European banks: take 3-year loans from the ECB at 1% and place the money in
southern European government bonds. EU has promised that banks no longer have
to take losses if a European government goes bankrupt. Banks have again been
given a "free lunch".
Apparently I am not alone in being able to see this simple
idea. Spanish and Italian 2-year yields fell like a stone yesterday. The
attached chart could be interpreted as indicating that:
• The market believes that Italy, Spain and Ireland no
longer represent a bankruptcy risk.
• Portugal is on the verge but may hold on to dear life
• The conditions of the Greek debt restructuring is still
not in place (personally I think that the haircut will end at 80% and not 50%)
ECB begins the new LTRO 3-year loan facility on 21 December. It
will be very interesting to see how much this credit facility will be used.
Rumours in the market say that banks in each country are buying domestic debt
in the two-year segment in some volume, a
sign that demand could exceed expectations. If that happens, the new
facility is as close to a Euro-QE as we can come without changing the charter
of the ECB.
If we now try to put a positive spin on this development so
it could read as follows: the ECB has with its new facilities taken big step
towards disarming the liquidity crisis. The EU has with his "paradigm
shift" given a guarantee for bonds issued by 16/17th of the euro zone. ESM
and EFSF will operate at full volume in about two to three months.
The lower yields at the short end of the curve mean that it
becomes easier for the troubled countries to achieve the goals of a budget
surplus now that their refunding costs are falling.
Hey presto - euro crisis is solved! Well, maybe we still have a
small growth problem here and there ...
This is of course the ultimate positive interpretation of
things. However, amid all the end-of-the world headlines, we must also remember
to keep an eye on the positive developments. ECB’s initiative is one of them.
Banks
Before we let ourselves be engulfed by a warm and fuzzy
Christmas feeling over the Euro-zone’s step in the right direction, let us
remember that the crisis is not completely gone. It will just move to where it
was always going to end. At the banks.
We have heard more than enough lack of ethics and
accountability in certain countries. The next theme will be that the private
sector has contributed dramatically to the increase in debt / GDP in the OECD
area and the banks have been the willing / necessary instrument in this wave of
financial leverage. With Europe’s abysmal growth prospects, the ongoing deleveraging
everywhere will continue to mean losses for banks.
No comments:
Post a Comment