ECB opens its cash taps again
LONDON (Reuters) - Money can't buy health or happiness, but it can help dull pain. This week the European Central Bank will throw a lot more money at the very painful problem of the euro zone's debt and banking crisis.
The chances are that the cash will indeed cool the fever, buying more time for Europe's politicians to find a cure for the underlying malady and so tempering what by common consent is the biggest risk facing the global economy.
The ECB on Wednesday will offer banks, for the second time, an unlimited volume of cheap three-year loans.
A Reuters poll of economists shows that banks, not about to look a gift horse in the mouth, will take 492 billion euros from the ECB, close to the 489 billion borrowed in the first deal just before Christmas.
"I don't expect this operation can solve all the problems, but hopefully it will take us past the worst point of the crisis," said Riccardo Barbieri, chief European economist at Mizuho International in London.
The first Long Term Refinancing Operation, or LTRO - one of several ugly acronyms spawned by the crisis - worked wonders.
At a stroke, cash-flush banks no longer had to worry about rolling over a big batch of maturing bonds. The threat of a catastrophic bank failure evaporated, and government bond yields in Italy and Spain, previously driven sky-high by a buyers' strike, started to fall. Business confidence rose, as did stock markets.
What the massive injection of liquidity has not done is to get the real economy moving. Cautious banks are conserving capital and parking spare cash at the ECB rather than lending.
"While we may have avoided a broad credit crunch, the 'Great Deleveraging' in Europe seems far from over; history suggests that European banks have a long way to go and the LTRO will slow but not stop the process," analysts at Morgan Stanley said in a report.
Barbieri at Mizuho agreed that banks were under pressure, but he said a relaxation of collateral rules for the new LTRO would principally benefit second-tier banks, enabling them to lend more to exporters and smaller enterprises.
"It would be disappointing if there wasn't a beneficial effect, but it will take some time for these effects to show up in the statistics," he said.
BALM, NOT A CURE
The green shoots of recovery, though still fragile, are already pushing up in the United States and economists will scrutinize Thursday's Institute of Supply Management survey to gauge the momentum of growth.
For the first time since January 2011, Citigroup economists this month made a small upward revision to their 2012 global growth projection and to forecasts for the euro area and Japan.
If things are looking up, it is surely in part because major central banks have thrown caution and cash to the winds to ride out the global financial crisis.
But Marc Chandler with Brown Brothers Harriman in New York said the LTRO was likely to conclude this activist phase, partly because a rise in crude oil prices to nine-month highs was complicating the economic outlook.
Few expect Federal Reserve Chairman Ben Bernanke to signal a third round of asset purchases, dubbed quantitative easing, when he testifies to Congress on Wednesday and Thursday.
Including this week's operation, the ECB, the Fed and the Bank of England will have nearly trebled their balance sheets since mid-2007 to almost $8 trillion, according to Paul Schulte with China Construction Bank International in Hong Kong.
The ECB's cash gusher effectively neutralizes the risk of a slump in European bank lending to Asia, Schulte said. In fact, in an echo of 2009, Asia was now at risk of a liquidity glut due to what he called "uncoordinated global loosening."
As for Europe, Nicholas Spiro of Spiro Sovereign Strategy, a London advisory firm, said it did not bear thinking what state the markets would be in without the ECB's actions.
But he also had reservations. The liquidity-driven turnaround in sentiment contrasted starkly with deteriorating economic fundamentals in Spain and Italy.
"The euro zone crisis is in abeyance. This should not be mistaken for its resolution. Investors would be well advised to be cautious," he said.
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