ECB Loan Program No Game-Changer
The ECB's new lending facility — 3 years at 1 percent, is a success. It will help ease the funding pressure European banks are facing.
But it's becoming clearer that it's not likely the money will be used to fund a carry trade, where banks take the money at 1 percent and buy sovereign debt with 4 or 5 percent yields. In Spain, both Popular and Santander have already said they will not use the money to play the carry trade.
What will European banks use the money for?
Some may simply park it with the ECB. It's also likely that a large part of the money will be used to replace funds that have already been borrowed from the ECB using shorter term (7 day, 3 month, 1 year) lending facilities. One analyst noted Spanish and Italian banks had already borrowed 250 billion euros in shorter-term funding from the ECB. The rest of the money could be lent to creditworthy borrowers, or to paying down other bank debt.
What's the problem with buying sovereign debt? Banks are already up to their eyeballs in this debt.
If this is the banks' strategy, it will be a positive for banks, but would be a negative for Europe due to less ownership of sovereign debt.
Importantly, the ECB will conduct another 3-year LTRO at the end of February, underscoring that they wil be there to backstop banks if they cannot raise money on the open market.
Bottom line: the ECB is the lender of last resort, and is acting that way.
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