Will the ECB’s Actions Be Enough?

As has been the case so many times during the Eurozone crisis, all eyes were on the European Central Bank (ECB) to intervene on June 5 following its executive board meeting. Eurozone inflation registered a paltry 0.5 percent in May, a problem for countries with high debt as it makes their debt burdens harder to stabilize.

ECB president Mario Draghi announced a series of measures in an attempt to reverse persistent low inflation. These measures were by the ECB’s standards bold; they would have been unthinkable even two years ago. Here are the three main actions the ECB took, and the possible outcomes of each:

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Repaying LTROs: Good News or Bad?

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. Read more of this post

Eurozone Crisis: In the Eye of the Storm

The Eurozone crisis has been in retreat since the introduction of the European Central Bank’s (ECB) three-year long-term refinancing operations (LTROs) in late December 2011. At the European Council Meeting in early March, journalists who cover the crisis fretted that boredom loomed. The current lull does not indicate that the Eurozone is in the clear, but rather it is simply in the eye of the storm, and more drama inevitably awaits. Read more of this post

Has the 3-year LTRO changed the path forward for the EZ crisis?

There has been relative calm in the EZ crisis since December last year, when the ECB announced a three-year long term refinancing operation (LTRO) and a sharp widening of its collateral requirements. Government bond yields fell in the periphery and debt issuance in January went remarkably well, particularly for Spain and Italy. Has the LTRO fundamentally changed the likely path forward in the EZ crisis? Read more of this post

3yr LTRO: Breaking or strengthening the banking/sovereign feedback loop?

The 3-year LTRO was announced by ECB president Mario Draghi following the December governing council meeting, alongside (among other things) a drop in collateral requirements at the ECB. These measures were designed to short circuit the endless feedback loop between sovereigns and banks by sticking the ECB right in between them. The idea is for banks to offload questionable assets from their balance sheets in exchange for cheap liquidity from the ECB, which banks can use to lend and invest as banks are meant to do. Will attempts to break the circular reference between sovereigns and banks and prevent the interbank markets from freezing succeed with this new 3-year LTRO, or will banks take advantage of the carry-trade and strengthen the feedback loop? Read more of this post


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