The second Long-Term Refinancing Operation (LTRO) by the ECB is a key event for the markets. Estimates vary widely, and the average of estimations is around last time’s number.
The final number is not that important. What’s more important is that it will fill the coffers of the banks and provide more stability. Will this allow letting Greece go?
The ECB has lent around €489 billion to European banks quite cheaply in return for low graded collateral. The cheap money encouraged banks to buy sovereign debt of Spain and Italy (as collateral) and enjoying the arbitrage. In addition, it filled their troubled pockets. The loans are for three years.
The indirect QE was hailed as a success by the ECB itself and also produced the “better time to default” argument by various speakers.
If the first LTRO provided stability, the second one will provide even more. The highest estimates reach 1 trillion euros, double the first operation. Even repeating the same scale of 500 billion or even 300 billion will certainly help banks and will serve as a shock absorber.
The ECB’s policy is “full allotment” – meaning every request that meets criteria will be met by freshly printed euro notes.
After the banks get more money, it will be even easier to let go of Greece.
LTRO II is planned for February 29th. Note that Greece has given bondholders up to March 8th to respond the bond swap.
In addition, Greece is required to pass a long list of 38 changes up to the end of the month. This is on the same date: February 29th, a very special date indeed.
If Greece fails to deliver and the deadline isn’t extended, the extra cash in the banks will allow the snowball to begin rolling down the hill.
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