The ECB has eased somewhat with the recent announcement of no longer absorbing liquidity, and with interest rates on deposits in negative territory and the announcement of targeted LTROs
Another round of LTRO
, not necessary at the moment, also remains a part of the arsenal.
Quite a few stronger banks paid back as soon as possible, whereas weaker banks took money in the second LTRO
The results of the CBPP and LTRO
expansion were mixed.
The ECB had a number of options on Thursday: it could have bought more member state bonds on the secondary market through its security market programme (SMP); it could have extended its LTRO
programme to provide more low-cost loans to troubled banks; it could have given the newly formed European security mechanism (ESM) a banking license, enabling the ECB to lend to the ESM directly and greatly increasing the ESM's firepower, or it could have cut its lending rate, currently 0.
For the time being, however, a mass sell-off of assets in an attempt to reduce leverage has not taken place, possibly due to the soothing effects of the LTRO
The alternative is more LTRO
which will increase risk appetite, triggering "core to periphery" flows.
The ECB's twin trillion Euro LTRO
have reduced the systemic risks in European banking and engineered a dramatic fall in Spanish/ Italian government bond yields.
The agency observed that the potential funding squeeze will be moderate as the slow nature of the potential European retrenchment, now further moderated by the LTRO
(long term refinancing operation) of the European Central Bank, will provide a timing buffer, allowing for regional adjustments.
This has been done both by reducing policy interest rates, but more importantly by getting the ECB to fully assume its proper role as lender of last resort to the European banking system through a programme of almost unlimited liquidity provision known as the LTRO
(short for Long Term Refinancing Operations) programme.
The mood I encountered about the world outside the US wasn't quite as dreadful as I had heard on previous visits, with a couple of people telling me that the ECB's 3-year LTRO
was a "game changer".
One supplementary six-month LTRO
with a preset amount of 25 billion euros will be allotted on April 2, settled on April 3, and will mature on Oct.