TWO years into the Eurozone crisis and still no more clarity and so many moving parts. Almost everyone we speak to seems to think the euro/dollar exchange rate is headed down to 1.20, but for all sorts of different reasons.
Let’s start with the European Central Bank’s (ECB) long term refinancing operation (LTRO) last month. European banks flocked to the three-year loans at one per cent, buying a huge €489bn (£404bn).
ECB president Mario Draghi last week said that the more time passes since the LTRO, the more it becomes apparent it has worked. He believes it prevented a major funding constraint and gave banks an insurance against the risk of being without liquidity.
Certainly we saw a drop in yields on peripheral bonds last week. Successful auctions of Spanish and Italian debt were interpreted by some as a positive. Those yields are very closely watched as a gauge of stress in the Eurozone economy, but they could shoot up equally as quickly.
And remember, there’s a second LTRO on offer next month. Some analysts think banks are loading up on high-yielding peripheral debt to use as collateral at the ECB’s February offer, after which point demand for the peripheral bonds could dry up and those yields may rise back up again.
Bear in mind those pesky ECB overnight deposit rates too.
Last week, banks chose to park record amounts of money with the ECB – making no money in the process – rather than lend it to each other. That indicates a seriously failing interbank market, with the LTRO billions sitting idle.
But the ECB reckons that, in fact, those banks using the overnight deposit facility are not the same names that borrowed in the LTRO.
So where is the LTRO cash? Maybe it is proving to be just enough money for now to keep things flowing along nicely. Even if that is the case, it still doesn’t fix the structural problems in the Eurozone.
There are still heaps of debt and there remains little growth. Youth unemployment (reportedly 50 per cent in Greece, for instance) is saving up trouble for the future.
Opinion is still divided even on how to interpret the results of the actions taken to unpick the crisis, never mind whether the euro will survive the year or even how a country goes about leaving the euro.
Until there’s visibility of what rock bottom looks like, markets can’t even start to price the alternatives.
Beccy Meehan as an anchor at CNBC. Follow her on Twitter @BeccyMeehan
