The ECB to Open Liquidity Spigots

As we’ve explained before in this article, LTROs, those gigantic loans, totalling $1 trillion euros from the ECB to the european banks, are akin to the Fed’s quantitative easing plans or, in other words, the use of the printing press. A large part of that money cannot be reimbursed, and the ECB will have to « roll over » the debt, e.g. to propose another gigantic loan.

Terms are approaching. LTROs are three-year loans that were issued in December 2011 and in February 2012. So they are due in December 2014 and next February, meaning very soon. According to the Bank of Italy, of the 255 billion euros borrowed from the ECB through the LTRO, italian banks only reimbursed 15%, or 38 billion euros. So, there still remains 217 billion euros to be paid in 2014... and for Spain, the amounts are just about the same.

Will the italian and spanish banks be able to reimburse those amounts? Serious doubts arise when we discover the contraction of their activities : credit for non-financial businesses is down 5.7% (by October 2013, year-to-year) for the italian banks and 19.3% for spanish banks! Consumer loans and mortgages are also down. Credit is an essential component of banks’ business bottom lines, and it’s sharply on the way down, as can be seen.

These poor statistics also contradict the ECB’s discourse, which explains that the liquidity provided by the LTROs, as well as its base rate close to zero (0.25%), are meant to sustain credit creation... It’s obviously not working, so let’s keep on trying! As a matter of fact, the ECB has no choice but to offer another LTRO, lest the italian and spanish banks go bankrupt. Thus, there is an urgency to avoid this risk, with a new quantitative easing plan. Markets which, in fact, have a tendency to mistake liquidity for solvency, will be reassured, Mario Draghi will lead the parade and government leaders will proclaim that « the crisis is behind us ».

All this, of course, doesn’t go well with Germany. The problem is, however, that it’s losing the upper ground with the ECB, its position becoming the minority’s. There are now more countries hoping for or satisfied with quantitative easing policies than worried about them... the « doves » have taken over the « hawks ».

The trick is now, for the ECB, to cajole Germany... There is talk about a LTRO which would be issued only to banks willing to augment business credit, but how can one force a bank to lend more? The ECB could buy titles from small businesses (in exchange for fresh money for the banks), but is it the role of a central bank to be holding such assets? In any case, the ECB will be counting on the sentiment of urgency facing the situation of the italian and spanish banks to impose a new deluge of liquidities.