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.