Guest post contributed by Elizabeth Goldman on behalf of Everest Forex
The Euro zone financial crisis has been at the forefront of economic woes around the globe for over a year now. As some countries lurch toward financial recovery, the eyes of markets around the globe remain focused on the sovereign debt crisis that is crippling growth in nations across Europe.
In an attempt to increase liquidity across the country and make it easier for governments to obtain affordable loans, the European Central Bank has initiated a second Long Term Refinancing Operation (LTRO).
On the final day of February, the ECB launched a second LTRO plan to European banks, allowing a blast of liquidity to hit the market and hopefully spur growth in markets around the continent. As of Thursday morning it was reported that more than 800 banks across Europe accepted roughly €529.39 billion in loans from the continent’s central bank. This comes on the heels of some 530 banks across Europe accepting €489.19 billion in loans in December. The total investment by the ECB now stands at €1 trillion. The question now is, will it work?
The ECB’s LTRO plan offers banks across Europe access to three year loans at low rates. The goal of the ECB’s investment plan is to provide banks with liquidity to provide personal and business loans to customers across the continent in the hopes of spurring growth again. Another goal of the plan is to provide governments with access to low rate loans to fund domestic plans. The move presents a tremendous gamble on behalf of the central bank.
By adding liquidity to markets across the continent now, the ECB is hoping to provide governments across Europe time to get their economies going again and spur growth. The hope is that in three years’ time the sovereign debt crisis will have ended and governments will be able to more easily repay loans.
The short term impact of the plan has been felt immediately. Markets throughout Europe and around the globe responded positively to the news out of Europe. One of the major concerns stemming from the financial crisis in Europe has been the future vitality of the common currency of the Euro (€). The second LTRO immediately provided a 0.3% boost for the Euro against the U.S. Dollar as it bumped up to €1.3435 to $1.
With the Euro nearly matching a three month high in its value against the dollar, optimism abounds that in the short term the plan will work and send the Euro’s value even higher. However, the long term prospects for the Euro are uncertain. Many analysts expect the value of the Euro to be unpredictable in the coming months and years as governments across the continent try to gain control over sovereign debt by enacting tough austerity measures on their populace.
The €1 trillion gamble the ECB has made could just delay the inevitable because the ability of governments to rebound in just three years is unknown. The main problem lies with the viability of markets in the PIIGS nations of Portugal, Ireland, Italy, Greece, and Spain. Austerity measures here, especially in Greece, are being met with harsh resistance among the population as they see the bailouts as helping the banks and providing nothing to the people.
In the end, Europe’s emerging markets who are not members of the common currency zone may see the biggest benefits from the recent LTRO. Currency markets in nations such as Poland, Czech Republic, Hungary, and Turkey continued their strong increases on the back of the latest LTRO. These emerging markets have seen their currency rising against the Euro and the Dollar since the first LTRO in December 2011. The announcement of the second LTRO further boosted their currency values.
As of Wednesday morning the Polish zloty is 9% higher against the euro since December, while the Turkish lira matched that gain against the dollar. During that same time period, the Hungarian forint is 7% stronger against the euro and the Czech koruna is 4% higher.
Ultimately it will take more than a constant influx of cash from the European Central Bank to have a real effect on the value of the euro. Governments, especially those burdened with unsustainable debt, will need to bring spending under control while still encouraging growth in their economies. Whether or not this can be accomplished is unknown, leaving the outcome of the latest LTRO shrouded in doubt.
The views and opinions expressed belong to the writer and do not necessarily represent those held by Everest Forex or ForexCrunch.com.
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