LTRO Effect Appears To Have Worn Off: The War For Spain

Authored By UBS' Larry Hatheway, The Merkel-Draghi wager: Will it pay off?

By Macro and Cheese:It has now been about four and a half months since ECB president Mario Draghi rolled out his supercharged version of LTRO--Long-Term Refinance Operations. The pair of ECB loan operations, one on December 21 of last year and one on February 29--was designed to boost the European banking system by lending more than EUR 1 trillion to at least 800 banks for a term of up to three years.

1. Banks that borrowed from the ECB under the Long Term Repo Operation (LTRO) can begin repaying, if they want. Banks must notify the ECB on a weekly basis about how much they want to repay. The ECB will publish amount to be paid back and the number of banks every Friday for the next few years, starting tomorrow. 2. Banks borrowed roughly 1 trillion euros in the two LTRO 3-year operations (Dec 11 and Feb 12). Italian and Spanish banks are believed to have accounted for around 60% of the use of the LTRO, German banks a little more than 10% and French banks a little less than 10%.

Considering the fact that back in December Europe was facing major bank failures and a systemic financial crisis in very short order, the implementation of LTRO1 was a "game changing" event.At the same time, many financial commentators have tended to exaggerate the importance of LTRO, claiming that this facility essentially eliminates the prospects of a major economic and/or financial crisis in Europe.It is important to understand the benefits of LTRO as well as its limitations. What LTRO Was And Is Able to Accomplish

In a surprise move the ECB cut rates by 25 basis points. They had plenty of reasons to do so such as German PMI contraction, Eurozone contraction, postponement of the EFSF bond sale, and the surprise referendum in Greece.

By Marc Chandler:The ECB surprised the market by cutting the key rates 25 bp. This was Draghi's first meeting. With the euro zone economy either in a recession or quickly headed into one, which in turn will help bring inflation off the 3% area, Draghi led the ECB to reversing the rate hike delivered four months ago. Around the same time, the Greek Prime Minister Papandreou told Sky News that there would be no referendum.

John Mauldin submits: Germany, Greece, and Spain Let's start with a little theater of the absurd. Quoting from a Reuters story (you can't make this up!): "Greek opposition lawmakers said on Thursday that Germans should pay reparations for their World War Two occupation of Greece before criticizing the country over its yawning fiscal deficits."