Courtesy of Mark Hanna of Market Montage
Risk markets first blush reaction to the LTRO is quite positive as their was huge demand to borrow from the ECB at 1%. Even NASDAQ is back to positive after being in the red, post Oracle blow up. Reuters expectation was 310B euros, so this figure came in at >150% over that level. Of course we do not know what this money will be used for, but as outlined last night the expectation is a good portion will be for a form of ‘backdoor QE/TARP-lite’ as an end around the treaty for the ban on ECB’s direct purchase of sovereign debt. (Did I put enough acronym’s in 1 sentence for you?) But as a speculator what the banks eventually use the money for is less important today, than the PERCEPTION of what the banks will use the money for. The meme is it’s for a massive carry trade and to stuff themselves with ever more debt (debt on top of debt solves everything after all!), at least of the short term variety. As long time readers now “perception is reality”…. until it no longer is. Frankly it seems perverse we are celebrating banks running to the ECB to borrow more….
Via Reuters:
- A total of 523 banks borrowed money at the tender with demand way above the 310 billion euros expected by traders polled by Reuters in the run-up to the operation. The banks’ lunge for funding pushed the euro to a one-week high versus the dollar and sparked a rally in stocks.
- The three-year loans are the ECB’s latest bold attempt to ease the euro zone’s troubles. It is the most the bank has ever pumped into the financial system, topping the near 450 billion it injected with its first one-year loans back in 2009.
- Its hope is that the ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and tempting banks to buy Italian and Spanish bonds, thereby calming markets and easing the currency bloc’s sovereign debt crisis.
- “The take-up was massive … much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably.” said Annalisa Piazza at Newedge Strategy, adding that the take-up probably came largely from banks in the euro zone’s debt-laden states.
- While an interbank lending crunch may have been avoided, it is much less certain banks will use the money to buy Italian and Spanish government debt, as French President Nicolas Sarkozy has urged, given the competing pressures on them to cut risk, rebuild capital and lend to business.
- “While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain skeptical of the idea that the operation will ease the sovereign debt crisis too as banks use the funds to purchase large volumes of peripheral government bonds,” said Jonathan Loynes, Chief European Economist at Capital Economics.
- Rather than a simple flat rate, the 3-year funds were offered at an interest rate which will be the average of ECB’s main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, at a record low of 1.0 percent.
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