呕吐戈尔三部曲2祭祀:ECB re 3 year LTRO

Apologies for being off line – far too many Christmas parties.

All eyes on the ECB’s 3 year LTRO auction today. Personally, I believe the take up by banks will be large, which, I believe, will be bullish (potentiall seriously bullish) for markets.

Just 1 example, why not obtain cheap (1.0% money) from the ECB, with a chance of the ECB lending rate declining even further, in exchange for your “toilet paper” collateral. The borrowed funds could be used by you to buy back/retire outstanding debt, which is trading at a discount, thereby providing an instant realised gain, an improvement in your core tier 1 ratio and lower interest costs in the future. Furthermore, European banks can repay the borrowed money in a year, if they wish. As a result, accessing the ECB’s 3 year LTRO is a no brainer in my view. In addition, European banks have significant debt funding requirements next year – analysts suggest over E750bn.

The ECB is encouraging banks to utilise this facility. The “stigma” issue will be superced by the ULTRA CHEAP ECB FINANCING.

Will banks borrow from the ECB to buy Euro Zone Sovereign debt is the other big question. Personally, I do not believe that LARGE and INTERNATIONAL banks will play this game in any meaningful way, as they will be concerned about adverse analyst/investor reaction, given that they have to disclose their holdings of Sovereign debt on a Q’rly basis. However, SMALLER banks and, quite frankly, banks that are in trouble will play this game, as I suspect they will work on the basis that they have no choice.

Most of you disagree with me about my view of impending QE in the Euro Zone. I continue to believe that it WILL HAPPEN. Indeed, the ECB’s financing of banks could be deemed QE, to the extent that the funds are not deposited with the ECB.

First the ECB is going to find it harder and harder to sterilise its existing bond purchases, let alone additional amounts bought under the SMP programme. Indeed, on a number of occasions to date, the ECB has  not succeeded in fully sterilising bond purchases – this problem will become a bigger and bigger issue.

Second, the ECB’s mandate is to keep inflation “below, but around 2.0%”. Euro Zone Inflation, will decline sharply, inlikely  2012 (starting end of 1st Q) – base effects make this a certainty and, in addition, the global slowdown will also have an effect. In those circumstances, the ECB can justify QE on the basis it is fulfilling its mandate. In addition, there may also be some kind of “fiscal compact” in place at that time, which will provide further ammunition for the ECB.

I remind you that German representatives, the only serious opponents to QE, comprise just 2 members out of a total of 23 ECB voting members.