European Bank Loans

The 2nd round of the European Central Bank’s Long Term Refinancing Operation (LTRO) was completed last Wednesday.  In short, the European Central Bank offered loans to European banks at 1% interest (essentially free money) for a three year term.  Many of those banks borrowed from the ECB and used the money to buy Spanish and Italian bonds, which has brought down those yields, thus easing the debt crisis in the short-term.  Read on for an analysis that I believe is spot on…

In sum, the LTRO was an excellent short-term move by the European Central Bank. Tomorrow’s(Wednesday) funding operation will likely also prove a big success as banks are expected to borrow €400-500 billion more from the central bank.

However, if this truly is the last round of funding, then the effects of the LTRO will soon dissipate, and we’ll see renewed pressure on EU leaders to take more substantial action to address the debt crisis. And given their recent dithering, that may not be such a bad thing.

Spanish Banks and the ECB