An article picked up by the blog soberlook “Trends behind declining LTRO balances; Italy overtakes Spain as the largest LTRO borrower” was interesting. It gives a good description of the shrinking LTRO balances, down ERU253 billion from the peak.
The post, which is a re-post of an article from FoxBusiness, makes several excellent points:
- The surge in LTRO borrowings in early 2012 was primarily the result of banks — especially Spanish — seeing their deposits fall and thinking they needed to grab as much liquidity as they could.
- But as deposits started to return and Euro sovereign debt gained liquidity, banks ended up with more money than they required.
- Lending has been weak in the Eurozone and bank balance sheets have been shrinking, further reducing the need for the LTRO cash.
- Italy has replaced Spain as the largest borrower in the LTRO program.
- LTRO repayments by Italian and Greek banks have been barely noticeable whereas all others have fallen.
LTRO borrowing is at 1% versus the ECB paying zero on cash deposits. The negative carry certainly incentivizes European banks to risk manage their LTRO balances carefully. We wonder if the negative carry is finally catching up, liquidity risk fears subsiding (Cyprus notwithstanding), or both?
We would contrast that to the Fed’s policy of paying an above market rate (25bp) on IOER.
A link to the post is here.