Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

19 April 2012

FT/Lagrange: Draghi’s remedy must not become a panacea


Pierre Lagrange writes that structural issues that are key to longer-term survival need to be addressed while the artificial support of central bank liquidity is in place - otherwise LTRO will simply prove a case of throwing good money after bad.

Earlier ECB bond purchases were an indication of wobbly resolve which caused the markets to gorge on negativity. LTRO has therefore transformed a soft belly into a 'six pack', but more exercise is needed. 

In providing a temporary resolution to the critical issue of liquidity, LTRO afforded us the opportunity to take a much more structural view of bank fundamentals and pricing dislocations. We have therefore been able to invest with a degree of conviction and to size positions in accordance with proximity to objective target prices.

There is increasing evidence that most of the monies from the LTRO have been spent or earmarked, more quickly than the markets thought. Central bankers will soon find themselves needing to buy government debt in the secondary market to prevent rates rising excessively in the periphery. How they do it and what it leads to is important. There is a variety of tools they can use, from securities market programmes (SMP) to relaxation of haircuts. They can also allow Spanish banks to issue government guaranteed debt, essentially creating ECB eligible collateral, similar to what Italian banks have been able to do. SMPs were stopped after the LTRO, but can be reactivated, we hope sooner rather than later. Markets need to understand central banks will not let rates spiral out of control.

This summer has the added volatility of important elections in Europe, as well as distractions from football to the Olympics, that increase risks of spikes on low volumes. Market interventions will need to be more stringent as a consequence.

Full article (FT subscription required)



© Financial Times


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment