Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Bifurcated US Stock Market - 29th Apr 17
Damn the Deficits, Huge Trump Tax Cuts Ahead! - 29th Apr 17
Gold Hostage to Stocks - 29th Apr 17
Warren Buffett Hates Gold… But Here’s Five Reasons You Need To Own It - 29th Apr 17
Stock Market Sentiment, Re-Fueled Along the Way - 28th Apr 17
Calling out the Central Bankers - 28th Apr 17
Fed's Third Inetrest Rate Hike and Gold - 28th Apr 17
USD/CAD - Invalidation of Breakout or Further Rally? - 28th Apr 17
What Happened to the Stock Market Crash Experts Were Predicting - 28th Apr 17
Earth Overshoot Day - Human Population Growth - 28th Apr 17
Misunderstanding GDXJ: Why It’s Actually Great News For Junior Miners - 28th Apr 17
What Makes Bitcoin Casinos So Remarkable? - 28th Apr 17
Financial Markets Improvised Explosives - 27th Apr 17
More Stock Market Short-Term Uncertainty As Stocks Get Close To Record High - 27th Apr 17
Elliott Wave Theory: Is Elliott’s Theory Enough? - 27th Apr 17
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

The ECB's Long Term Refinancing Operation (LTRO) is Bullish for Stocks

Stock-Markets / Stock Markets 2012 Feb 13, 2012 - 07:03 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleJack Barnes writes: If you listen to the talking heads, there is no end in sight to the Euro crisis.

Even with the European Central Bank's (ECB) recent Long Term Refinancing Operation (LTRO), Greece is still making all the headlines.


As of late last week, a possible new deal has been made in Greece. However, the finance ministers that are responsible for the deal are not sure it will be enough to release the second bailout of Greece.

The ECB has been demanding that debt it bought at a discount be honored at full par value. It is now reported that the ECB will sell these debts at cost, and allow the debt to be retired.

This is a huge first step in the process of getting Greek debt levels low enough to be sustainable.

Yet, we are still well into the second year of this crisis and the market is growing tired of endless European emergency meetings.

It reminds me of the period around January 2009.

The reality is Europe needs to go through a hard, brutal adjustment period, where the weak states that cannot handle being in the European Union (EU) leave.

While a New Greek deal has been announced, few people believe it will be the last deal, or the best deal. That is, if it is even ratified in the end.

"It's up to the Greek government to provide concrete actions through legislation and other actions to convince its European partners that a second program can be made to work," EU Economic and Monetary Affairs Commissioner Olli Rehn said.

The rolling bailout process appears to be set up to happen this spring, as the ECB pumps fresh liquidity into its banks for unlimited dollar amounts. The drain on the balance sheets of Euro banks appears to be ending.

The ironic angle few people are tracking is that U.S. banks have been helping to drive Europe's big banks into this crisis.

Setting the Stage for the Second LTRO
Let me explain.

U.S. banks have loaned money to European banks via our money market accounts for periods between seven and 270 days on average.

So when you left cash in your money market account, a significant portion of that cash was actually being invested in unsecured loans to European banks in a search for higher yield.

These funds were typically rolled over at the current market rates, allowing Euro banks access to shorter-term liquidity. However, that began to change in July 2011 when U.S. banks started shortening the terms of the funds or flat out began to repatriate them.

This shift by American banks caused European banks to lose access to what they were using for near-term liquidity. European banks were using short-term loans to make longer-term loans to their clients.

The process of paying back their short-term funding, while still holding onto longer term loans has stretched their balance sheets even more.

This reversal of funding caused an expansion of the leverage at the banks, as they have loans outstanding but have to pay back the source of them.

As result of this liquidity crunch, the ECB rolled out a program to allow banks to recapitalize themselves.

It's called the LTRO (Long-Term Refinancing Operation). Think of it as being like the U.S. Troubled Asset Relief Program (TARP) but for Europe's banks.

The LTRO allows banks to bring their loans to the table, turn them in with a small haircut, and receive cash/capital in return.

The first of the LTRO operations was in late 2011 and raised about $500 billion in funds for the banks. The loan terms are amazing. The ECB is charging just 1% for these new funds, which are good for three years.

This will allow banks to deposit those long-term loans at the ECB and get back cash at a discount to help lower their risk levels.

The second LTRO is scheduled for Feb. 29, with estimates that it may be two or three times the size of the first.

A Massive Injection of Cash
If so, combined we are talking about as much as two trillion additional euros that may be injected into the European banking system in a short period of time. This capital will be put to risk.

Like the TARP, these funds will allow Euro banks to take risk again - if only to try and pay back losses and capital haircuts they've had to take.

Here is the issue: that money will seek the highest rate of return as it trickles down to the banks' trading desks.

This means it will most likely show up in places like commodity prices, and bank and sovereign debts trading at a discount to par. Banks are being encouraged to leverage up on their host nations' sovereign debts.

While the market never repeats, it does rhyme sometimes.

It's my expectation Europe is preparing to recapitalize its banks via LTRO to help them weather the coming storm when Greece officially leaves the EU and the focus turns to other weak member states.

Remember, whatever deal Greece cuts now, Portugal and Ireland will want to renegotiate their deal. The Greek drama is only the first act. There is going to real market impact when the second LTRO is finalized.

What happens after that will be very noteworthy...

Soon, thanks to the LTRO, European blue chip stocks could be an interesting place to put speculative funds to work again.

Source http://moneymorning.com/2012/02/13/ecbs-long-term-refinancing-operation-ltro-bullish-for-stocks/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife