Thursday, 22 December 2011

ECB three-year scheme sees demand from banks, spurs talk of QE

The European Central Bank's new three-year long term refinancing operation (LTRO) appears to have met a need. From Bloomberg on Wednesday:

The 523 euro-area lenders took a record 489 billion euros ($638 billion) from the Frankfurt-based central bank in 1,134- day loans today, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. That equals about 63 percent of the European bank debt maturing in 2012, according to Goldman Sachs Group Inc. analysts.

Edward Harrison thinks that “the LTRO is really the ECB equivalent of QE3”.

He is not the only one to think so. From Bloomberg:

John Taylor, founder of currency-hedge fund FX Concepts LLC, said the European Central Bank three-year loans to euro- area banks is a form of quantitative easing and the euro is destined to slide next year.

“This is QE in another form,” referring to the monetary policy the Federal Reserve used in undertaking of purchasing debt to keep long-term rates low, Taylor said in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker. “Three-year money at a low price -- you can give it back after a year - it’s a giveaway. What scares me is what the hell are they going to do with it? They’ll buy Spanish and Italian debt.”

The euro did eventually end down on Wednesday but Spanish and Italian note yields rose.

Nevertheless, Floyd Norris thinks that, for all the tough talk from ECB president Mario Draghi, he may have done “enough to stem the European crisis for at least a few years”.

Still, it will probably take a while for confidence to fully return to the euro area. Consumer confidence for one deteriorated in December to the lowest since August 2009.

With market attention on Wednesday focused on the ECB's latest operation, the Bank of Japan's monetary policy meeting generated relatively little interest. The BoJ left interest rates unchanged but said that the country's economic recovery “has paused”.

Indeed, Japan's exports fell 4.5 percent in November from a year earlier, worse than the 3.8 percent fall in October. The trade deficit widened to 684.7 billion yen in November from 280.2 billion yen in October.

Meanwhile, the US economy continues to generate positive reports, the latest being a 4.0 percent increase in existing home sales in November.

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