Repaying LTROs: Good News or Bad?
January 24, 2013 1 Comment
Research teams across Europe are busy estimating the size of the repayments the European Central Bank will accept next week on the long-term refinancing operations, or LTROs, that banks borrowed last year. I think they’re asking the wrong question.
Much more important is whether repayment will be positive or negative for the euro area, and both are possible.
Just to recap: The ECB’s three year LTROs served as a sugar hit for the euro area’s markets at the end of 2011 and beginning of 2012. Borrowing costs for euro area banks and their sovereigns were on a seemingly endless upward march, and many investors worried that the banks would be unable to roll over the whopping 503 billion euros of maturing debt in 2012. So, the central bank stepped in.
The injection of liquidity that followed amounted to nearly 1 trillion euros. It helped the banks to meet their refinancing needs, and in doing so took the failure of a major European bank off the table.
The LTRO gambit had a double benefit, because domestic banks used the extra liquidity to lend to their governments, relieving pressure on them as well. The banks bought domestic sovereign debt that yielded more than the ECB loans.
To read the rest of this piece, please see the original post on Bloomberg View’s Ticker.