Global markets skittish as eurozone casts a lengthening shadow
Global markets continue to be skittish and the key focus remains the problems of the eurozone, which are unlikely to be resolved in the near term. The recent injection of funding by the European Central Bank through the loans offered to banks as part of the three-year long-term refinancing operation (LTRO) have provided the liquidity needed to avoid a Lehman Brothers-style credit crisis. 523 banks reportedly took up €489 billion liquidity offered by the ECB as part of the unlimited 3-year LTRO package. We believe that in addition to the €290bn of refinancing of current ECB facilities, €200bn will cover the refinancing needs for banks for the first two months of 2012.
What concerns us now is how banks will use the money and whether it will flow through to the wider economy. We suspect it will not. We anticipate that some peripheral banks will borrow the cash from the ECB at around 1 per cent and use it to purchase local government bonds with higher yields. Entering into a carry trade that will bind banks and governments closer together in a ‘Faustian pact’ in which governments needing to raise finance secure funding, but at the cost of increases in peripheral bank exposure to sovereign debt from their own already heavily indebted economies.a contagion effect. (...)
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