There is, however, little sign that these three-year funds are having much impact on the real economy. Yes, peripheral banks have increased their purchases of government bonds considerably, successfully easing the sovereign funding crisis that was brewing at the end of last year. Since the first LTRO the Italian 10 year has moved from a yield of 6.75% to 5.34%%. The Spanish equivalent has moved from 5.6% to 5.02% However, according to SocGén, a larger number of banks planned to use their LTRO 2 cash for debt repayments only. Indeed, several have funded their entire requirement for 2012 and beyond via this source. This might be good news for their shareholders, but is this the best use of ECB funding at this point? So much for the transmission of credit to the real economy. One three-year LTRO was essential and necessary to avert a banking crisis and give banks the opportunity to buy themselves some time. Two LTROs is starting to look a bit like subsidization of the banking sector. There have even been mutterings in the market that the ECB will need to announce a further three-year auction in September. That just looks greedy. Indeed, ECB executive board member Joerg Asmussen has been quoted in Handelsblatt as saying that the central bank cannot commit to offering more three-year cash to euro-area banks after the February auction.
There will be no shortage of demands on the ECBs balance sheet in the months to come, so the regions banks need to readjust themselves to the realities of their market and get on with delevering themselves and right-sizing their balance sheets without unlimited cheap funding to defer the inevitable.