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The European Central Bank is dishing out ?529.5 billion ($712.8 billion) in three-year loans to financial institutions, the latest effort to stave off the eurozone’s sovereign-debt crisis.
The big question is whether investors will continue reacting positively to the ECB flooding the marketplace with additional liquidity.
The second so-called “LTRO” attracted more demand than the first implementation in December, as 800 banks came knocking at the ECB’s doors for what is essentially really cheap money. As the Journal’s David Enrich points out, the goal is “to avoid an escalating crisis as banks struggle to pay off maturing debts and also to mitigate a sharp pullback in bank lending to customers across ailing European economies.”
Increased borrowings can be viewed as a double-edged sword. For one, flooding the market with more liquidity has certainly helped risky assets in the past. Would we be celebrating Dow 13000 if it weren’t for all of the Fed’s quantitative easing efforts? Probably not.
European banks also get to boost their balance sheets, which should come in handy in case the sovereign-debt crisis rears its ugly head again.
On the flip side, the elevated demand for the ECB’s program suggests the European banking industry is still plagued by funding problems. The notion that the ECB is turning into the lender of last resort doesn’t exactly underscore a healthy and sustainable economy.
“While the liquidity provision helps keep tail risks for European banks at bay in the near term, as we have reiterated many times in the past, LTROs do not address the underlying solvency issues and ultimately funding stresses can quickly return,” says Nick Matthews, senior European economist at Royal Bank of Scotland.
Since the size of the second LTRO wasn’t significantly above expectations, Matthews warns the headline number could disappoint risk sentiment.
U.S. stocks opened slightly higher. The Dow edged up 18 points to 13024, while the S&P 500 tacked on 2 points. European markets were modestly higher, with the Stoxx 600 up 0.4% in recent action.
“The question going forward for the markets now is will it be a sell on the news, not just for equity markets but especially for the debt of Italy and Spain, still the two countries Europe needs to fully ring fence,” says Peter Boockvar, managing director at Miller Tabak & Co.
Ultimately, the LTRO can’t be viewed as the white knight that will save Europe from destruction. It may ease funding pressures, but bigger and broader actions need to be taken to solve the crisis.
WSJ’s Simon Nixon may have said it best: “The LTRO is no panacea for the euro zone’s economic problems. True, the ECB loans averted a nasty credit crunch and easier financial conditions will provide some support to the real economy. But banks are unlikely to use LTRO money to fund new loans to businesses and households which typically have maturities beyond three years; most banks will anyway continue to deleverage to meet new capital rules. Any lasting boost to the real economy will depend on banks and governments pushing ahead with restructuring and reforms to boost productivity and competitiveness.”
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. Lead writer Steven Russolillo spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com.
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