About That European Bank Liquidity Injection

Remember last week when the ECB announced their $731 Trillion bailout $645 Billion 3 year loan program?  I was trying to explain how this intervention by the ECB was much worse than anything the Fed is doing.  It’s like QE, in a way, but the banks step in the middle and earn all of the profits from the carry trade – borrow at 1% from the ECB, lend at 3%+ to their sovereign debt issuers.  I get the sense that the average American is under the impression that this is what’s happening with the Fed and the U.S. banks, but that’s not the case.

Today we get this data point from the NY Times:

“Italy’s short-term borrowing costs were halved Wednesday at an auction of government bills, easing the immediate pressure on the country’s economy.

The sale of €9 billion, or $11.8 billion, of six-month Treasury bills was seen as the first post-holiday pointer to condition of the beleaguered euro zone.

The bills were sold at a yield of 3.251 percent, sharply down from 6.504 percent at a previous auction in late November. Demand was 1.7 times the amount offered, compared with 1.47 times previously.

In an auction of two-year bonds, which raised €1.7 billion, the yield fell to 4.853 percent from 7.814 percent last month. The auctions raised a total €10.7 billion.

The lower borrowing costs appeared to reflect the adoption of a new austerity package in Italy, as well as a huge infusion of low-cost, long-term liquidity into euro zone banks by the European Central Bank last week.

With the E.C.B. now charging only 1 percent interest on three-year loans — an unprecedented offer — banks can take the cash, buy short-term securities and earn a quick profit.

Just in anticipation of the loans, Spain’s borrowing costs fell drastically at an auction on Dec. 20. And the E.C.B. will offer the three-year loans again in late February.

On Thursday, Italy plans a sale of €8.5 billion of long-term debt, which analysts said would be a more significant indicator of market sentiment.”

The short term carry trade – on this Italian 6 month debt – is a lot more of a layup than the longer term carry trade, of course.  We’ll get a better sense on Thursday after the results of Italy’s long term debt sale.


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