European lenders had a good time at the ECB’s last -minute Christmas party. Euro zone bank treasurers had been wondering for some time how they could refinance the euro 600 billion of funding due in 2012. The European Central Bank on December 21 unveiled part of the answer— a massive euro 489 billion, three-year repo that is its biggest liquidity facility ever.
At first sight, the ECB’s largesse looks like something for nothing. The so-called longer-term refinancing operation (LTRO) will cost about one per cent, way below what would be funded privately, if the option was available. Well over 500 banks came to the ECB window, reducing the risk that a small band of users will be identified and stigmatised. And lenders in countries like Spain, Italy and France can deploy this ultra-cheap funding to fund their sovereigns and corporate, taking advantage of the jumbo spread.
But those who haven’t paid a visit to the LTRO opium den have not been washed away in a sea of moral hazard. The latest LTRO may be bigger, but it is more focused — half the number of the banks which participated in the last record splurge in 2009. Even as they deleverage, users will need a significant part of their new cash to serve as a buffer in order to meet next year’s refinancing hump. And even if they don’t intend to play a risky sovereign carry trade, banks in some countries may soon be under political pressure to do so.
All this reduces rather than increases the chance that banks might start funding from the private sector any time soon. Corporate treasurers pondering where to put company deposits will be wary of banks stocking up on risky sovereign debt. The more assets are pledged with the ECB, the less of the balance sheet will be available for potential senior unsecured investors in the event of a collapse. And while users of the facility are currently anonymous, it’s always possible that names could be divulged in the future, as eventually happened in the US following the provision of liquidity facilities from the Federal Reserve.
The ECB’s liquidity should enable the chastened staff of peripheral euro zone banks to enjoy their Christmas parties. But the hangover could last years.
