LTRO in the limelight!

At the end of February, the ECB will offer unlimited 3year LTRO. There has been rumor after rumor about ho much the take up will be the last one was 2-3 times Decembers take up of 489bn. This is due to the fact that the recent easing of collateral rules will be in place and the embarrassment of borrowing money from the ECB seems almost non-existent. To aid the expectation of a high take up is the fact that the ECB have not even hinted that there will be another 3year LTRO, despite there being theory of another, and possibly an even longer one, but banks still have to regard this as the last one – so make the most of it. 

The headline from the German FT ("Banks set to double crisis loans from the ECB") has received a lot of attention. The report says that "several" large banks from the euro zone told the FT that they "could double or triple" their takes at the LTRO. This is the main contributor to the moves we have been in the markets.

The easing of collateral rules involves instruments that some reports are heavily weighted to French banks. While other countries' banks may not have as much of the new collateral, they may be needier. It is said that Italian banks were the largest hoarders in December’s LTRO.

Some argue that the LTRO will give banks a liquidity bumper to protect from the contagion of a potential disorderly default in Greece, compared to the last one which was supposedly used to pay a lot of redemptions and coupons. The pressure Portugal has been under this month, especially since the S&P downgrade warns the supposed firewall has been breached. Investors need a high take up of the LTRO to boost confidence, I hate to think what will happen if it turns out to be weak – although I would be extremely surprised if it was!