ECB is banking on second shot of cheap money
ACRONYMS abound when it comes to the global financial system. First there was Tarp – the 2008 US Troubled Asset Relief Programme – which described the $700bn used to buy or insure troubled bank assets. Fast forward to December 2011, and the European Central Bank embarked on its first three-year Long Term Refinancing Operation or LTRO. The ECB lent European banks €489bn over three years at incredibly low interest rates.
It was hoped that banks would take the cash to lend to businesses and to buy government bonds from the Italians, Spanish, and Portuguese. This would help lower the cost of borrowing for these peripheral countries and alleviate their debt burden.
At the time, we didn’t know whether it would work. But the cheap money seems to have done the trick, at least if you look at the falling bond yields of peripheral countries. This has allowed the ECB to dramatically scale back its own purchases of sovereign debt.
Nor did we know how many banks would participate in the programme. In the event, more than 500 European banks took up the offer of cheap euros, proving the stigma of going cap in hand to the ECB for money has vanished.
Now LTRO Mark II is upon us. The size of LTRO II could range from €200bn to €1 trillion. Many of my guests say that if banks don’t take up the offer, it could be interpreted as a bad thing. But you could also argue that low uptake is a sign that banks are now strong enough to survive without the cheap cash.
Currently, the banks in northern Europe seem to be suggesting that they won’t take part in LTRO II, although the same can’t be said of the southern European financials. According to ING Research, most of the take-up for LTRO Mark I came from the countries with stressed-out banking sectors such as Italy, which accounted for 23 per cent of funds borrowed, followed by Spain on 22 per cent and – equally notably – France on 14 per cent.
Last week, I interviewed Alec Young, a global equity strategist from S&P Capital IQ. He told me that Europe matters a lot less to the rest of the world since the LTRO kicked in. He said: “A few months ago, every asset class was driven by Europe, but since LTRO, Europe is being driven by Europe, leaving other asset classes to go about their business.”
But for me the key issue is still this: Will peripheral countries be able to cope with their debt burden without the direct intervention of the ECB?
Louisa Bojesen is a CNBC Anchor
Follow her on Twitter @louisabojesen