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No More LTRO Shots for Eurozone?

The European Central Bank is about to lose another one of its shaky potential rescue ladders. The Long-Term Refinancing Operation (LTRO), Europe’s  equivalent of the American TARP, appears to hemorrhaging money as European banks run out of quality items to pawn to the ECB.

The Financial Times reports:

Last month, for example, Ray Dalio, head of Bridgewater Capital, the world’s largest hedge fund, warned his clients that “Spanish banks’ collateral is running out”. Like a cash-strapped household, which has pawned all its jewellery, these banks have already pledged away their valuable assets, he claims.

The U.S. was able to push through legislation that allowed the government to buy all kinds of mediocre assets to relieve pressure on banks. Lacking a central government, however, Europe has no ability to do the same, and at this point it looks exceedingly unlikely that any binding agreement to do so will be reached. Making matters worse, the strictly worded charter of its central bank limits its ability to take action.

With both Brussels and Frankfurt running out of refinancing options, Europe may have already received its last short-term booster shot.

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  • Dean Jackson

    Yes and possibly no. First, I think Dalio is probably correct. However, while there are limits on the ECB, some of them have been circumvented and others may be in the future. For example, the ECB has consistently lowered the standards of what it will accept as collateral as various countries have been downgraded. Another example is having governments place guarantees on bank debt solely so said debt can be repo’d with the ECB. Possibly the biggest trick has been the ELA where a national central bank can set its own standard and essentially the bad collateral is what backs the Target2 balances which are ballooning the Buba’s balance sheet.

    Another take was presented by Evans-Pritchard of the Telegraph this past weekend. While I think he overstates the case, you might want to consider it.

    “Venetian cunning of Draghi-Monti masterplan may save euro for now”

  • Andrew Allison

    The eurozone, ex Germany, is bankrupt. The current debate is about whether Germany (which has undoubtedly benefited greatly from it) can be persuaded to bail it out. Methinks the answer is “reset”, i.e., only if there’s power to prevent members from spending irresponsibly.

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