The numbers are in regarding the, so far, final 3y LTRO done by the ECB; since May 2011 the ECB’s balance sheet has risen by 1.12 trillion euros. For a central bank who, on its own account, is not conducting QE, we would be interested to see what would happen if it did.
The ECB’s two LTROs have done the job so far and significantly reduced tail risks in the European banking system while at the same time eased the yield pressure on Spanish and Italian sovereigns. Especially the last point is important as it would have been impossible for the EU and IMF to bail out either Italy or Spain and as such, explicit monetisation of these countries’ deficits would have been the only way out.
This also means that the EU and IMF can concentrate on Greece, Portugal, and Ireland which are all economies that are either in or imminently close to a default/debt restructuring. Solvency issues remain in both Spain and Italy, but the fact that these economies have now moved below the markets’ radar is valuable in itself.
You cannot however backstop the European banking system without costs, and the costs are exactly that it is becoming increasingly difficult for the ECB to argue that is liquidity operations are temporary. In reality though, the ECB’s liquidity operations now constitute a permanent and necessary feature of the European financial system.
Since 2008, the ECB has conducted a number of 6m and 12m liquidity operations of which by far the biggest one was the one in June 2009 where 442 billion euros were lent out at a maturity of one year. This figure pales however in comparison with the over 1 trillion euros the ECB has added in 3y lending to European banks in the past 6 months. There has been much discussion in this context about the fact that a lot of the liquidity offered by the ECB is simply being moved from 1y lending to 3y lending. Thus, it is said, the actual net increase in liquidity is significantly less than the headline numbers being thrown around.
This is true in the technical sense, but playing down the ECB’s policy with this argument is misleading.
One of the main effects of the ECB’s policy is to keep its balance sheet larger for longer and in the process accepting lower quality collateral for a larger amount of lending. This allows European banks to refinance and lock in favorable borrowing conditions for a longer time. This, in turn, will help governments who can draw on funding from domestic banks at maturities which make for a less risky rollover schedule. The net effect of the ECB’s policies is then to push out the refinancing schedule of all major financial market borrowers in the euro zone.