Europe's LTRO: The Downside and the Upside
The Long-Term Refinancing Operations of the European Central Bank have been hailed by the markets as a major step toward stemming the European sovereign debt crisis. But critics have called it a kind of a Ponzi scheme which is bound to collapse. In today's column, we'll discuss how the LTRO could actually be a very helpful bridge to a healthier Europe, but how, if it fails, it could plunge Europe into a deeper morass.
The LTRO is a very simply proposition at its core. Banks can borrow from the ECB for a term of as long as three years by pledging certain collateral. The collateral is subject to a "haircut," which is the bond market's equivalent of a margin equity requirement. For most euro-zone sovereign bonds, the haircut is effectively zero. The rate on the loan is 1%, and the loan isn't subject to margin review. That is, if the trading value of the pledged asset drops, the ECB can't demand more collateral. So essentially, a bank can buy any sovereign bond that yields more than 1% and earn arbitrage profit....607 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
There’s no substitute for a trading floor to get great ideas, so Jim Cramer created a better one at Real Money and blogs there exclusively. We then added legendary hedge fund manager, Doug Kass, with his exclusive Daily Diary and best investing ideas. Staffed with more than 4 dozen investing pros, money managers, journalists and analysts, Real Money Pro gives you a flood of opinions, analysis and actionable trading advice found nowhere else, and allows you to interact directly with each expert.
Already a Subscriber? Please login.
