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2012-03-01 05:45:59
Feb 29th 2012, 12:56 by P.W. | LONDON
AT LAST the waiting has ended. Over the past few weeks the markets have been
obsessing over just how much liquidity banks would tap from the European
Central Bank (ECB) in the second of its extraordinary three-year LTROs
(long-term refinancing operations).
The answer came on February 29th from the Frankfurt-based central bank of the
17-country euro area. The ECB announced that it had lent 530 billion ($710
billion), a bit more than traders had expected. The funding also exceeded the
previous LTRO, in late December, which had already provided a massive 489
billion. The number of banks dipping into the honeypot reached 800, well above
the 523 that borrowed in the first operation.
Just as sequels rarely match the success of blockbuster movies, so with the ECB
s second funding operation. For one thing, since the amount was only a bit
higher than expectations, it should broadly be priced into the markets (though
such rationality should never be taken for granted). For another, more of the
take-up is likely to have come from banks outside the euro area.
More important, the first three-year LTRO proved a runaway hit because the ECB
showed its hand or rather that of the wily Mario Draghi, who had taken the helm
only weeks before, replacing Jean-Claude Trichet, the bank s previous
president. No, Mr Draghi clearly signalled, the ECB under his leadership would
not become the lender of last resort to troubled governments. Instead, it would
become the lender of first resort to troubled banks, which could in turn prop
up toppling sovereigns by purchasing their debt. Moreover, it would provide
funds for a record length (LTROs are usually for months rather than years and
the previous record was just one year) and at dirt-cheap rates (the three-year
average of the ECB s main policy rate, currently at 1% and tipped to fall later
this year to 0.5%).
The ECB s eleventh-hour intervention in December dampened down the euro crisis,
which had threatened to go critical. Italian and Spanish government bond yields
had soared and scared investors had shunned European banks, causing an ominous
funding drought. The first three-year LTRO broke this spiral of pessimism by
removing fears of an imminent banking implosion.
As confidence returned, funding markets re-opened for stronger banks in
stronger European economies. And crucially, the ECB s backdoor approach worked
a treat in Italy and Spain. Banks there lapped up the central bank s funds and
purchased their own governments debt. That pushed down Italian and Spanish
sovereign bond yields whose spreads over German Bunds narrowed markedly.
At best, the second LTRO will maintain that return of confidence for a while.
But the ECB s provision of liquidity buys time rather than solving the euro
area s deep-seated problems, which are as much political as economic. A sharp
reminder of the dangers ahead came on February 28th when Enda Kenny, the Irish
prime minister, unexpectedly announced that Ireland would hold a referendum on
the European treaty to enshrine budget discipline in national law. Even if the
Irish vote against it, the fiscal compact will take effect, since it requires
only 12 countries in the euro area to back it. But the referendum will reveal
public resentment against the harsh austerity that has been imposed on Ireland
under its bail-out.
There are other tripwires ahead, highlighted by this week s decision by
Standard & Poor s, a credit-rating agency, to put Greece into selective
default as a result of the debt-exchange deal that will slash the face value
of private-sector holdings of Greek public debt by more than half. A vote in
the German parliament endorsed the linked second bail-out of 130 billion, but
opinion polls revealed that over 60% of Germans were opposed to it. Even if the
debt swap goes according to plan, an election in April could move Greece closer
to an exit from the euro area, with potentially forbidding consequences not
just for Greece but the rest of the single-currency zone.
Perhaps most worrying of all, the economic prospects are not just bleak for
bailed-out and beleaguered Greece and Portugal but also for much larger Italy
and Spain. Italian and Spanish borrowing costs may have fallen but that will be
of little avail if these economies, already forecast to shrink this year, are
unable to return to growth. Moreover, the austerity that Spain must undergo is
fiercer than had been expected since its deficit last year has turned out to be
8.5% of GDP rather than the 6% that had been targeted.
The ECB s second dollop of easy money has comforted markets. But the euro
crisis has not gone away. It would not take that much for it to turn acute
again.