ARmy Rumour SErvice

**Wordsmith** · 20-01-2012, 11:49

Originally Posted by Alsacien

If the ECB did QE like the UK has, then these governments would for sure take the path of least resistance....

I thought the LTRO was a mirror image of QE in that the ECB has made cheap funding available to the banks in the hopes that they'll buy sovereign debt and thus drive yields down. The B of E just does things in reverse.

A rose by any other name...

And changing the subject slightly, I see the EU is going to write automatic fining for exceeding stability targets into the new Euro zone treaty. I'll be interested to see if this results in foot dragging by the more profligate nations in the Euro. Its one thing signing up to vague principles and another signing up to a mechanism that generates automatic fines.

Wordsmith

(Oh, how I would laugh if France got hit by automatic fines in the future).

**Alsacien** · 20-01-2012, 12:03

Originally Posted by Wordsmith

I thought the LTRO was a mirror image of QE in that the ECB has made cheap funding available to the banks in the hopes that they'll buy sovereign debt and thus drive yields down. The B of E just does things in reverse.

A rose by any other name...

And changing the subject slightly, I see the EU is going to write automatic fining for exceeding stability targets into the new Euro zone treaty. I'll be interested to see if this results in foot dragging by the more profligate nations in the Euro. Its one thing signing up to vague principles and another signing up to a mechanism that generates automatic fines.

Wordsmith

(Oh, how I would laugh if France got hit by automatic fines in the future).

A LTRO is nothing like a QE solution, lending via LTRO's (on a shorter term) is part of the normal central bank business of liquidity management, in this case banks just got a longer planning horizon and most just exchanged short term for long term. QE is adding additional funds to an ecomony, the "printing money" analogy, by directly purchasing debt on the primary or secondary market, money that will need to be removed should inflationary pressure rise.
The fundamental difference is the UK government has cheap borrowing to stimulate the ecomony (albeit with a butchers bill to pay at some point), whereas in mainland Europe the banks - the direct lenders - have cheap loans which they can pass on.
It should be obvious which approach appears to be working best....
The intention was to avoid a credit crunch, which it appears to have done. The banks now have guaranteed long term liquidity which they will want to make work either by investing or lending, slowly they appear to be doing so, bond purchases being only one side effect that has happened more than foreseen, but could equally change in favour of other options.

**Wordsmith** · 20-01-2012, 12:09

Originally Posted by Alsacien

The fundamental difference is the UK government has cheap borrowing to stimulate the ecomony (albeit with a butchers bill to pay at some point), whereas in mainland Europe the banks - the direct lenders - have cheap loans which they can pass on.

OK - so I'm curious. Why is the B of E going for QE, with the ECB going for LTRO?

If LTRO was the magic bullet, you'd think the B of E would have leapt on the bandwagon...

Wordsmith

**Alsacien** · 20-01-2012, 12:15

Originally Posted by Wordsmith

OK - so I'm curious. Why is the B of E going for QE, with the ECB going for LTRO?

If LTRO was the magic bullet, you'd think the B of E would have leapt on the bandwagon...

Wordsmith

The quick answer.
The BofE followed the Fed, its a standard non-conventional measure. The option was not open to the ECB, so they got Creative and expanded a tool currently in use.
You also have the slight complication of the government owning banks....therefore extending liquidity twice looks odd.

Just to add. BofE did something similiar with the SLS in 2008, but decided not to renew it.

**bokkatankie** · 20-01-2012, 20:16

Originally Posted by Alsacien

It should be obvious which approach appears to be working best....

Nope you have got me there, it is not obvious; which approach is working best?

**Alsacien** · 20-01-2012, 20:19

Originally Posted by bokkatankie

Nope you have got me there, it is not obvious; which approach is working best?

If you are not able to figure that out for yourself, you are posting in the wrong forum...

**bokkatankie** · 20-01-2012, 20:28

Originally Posted by Alsacien

If you are not able to figure that out for yourself, you are posting in the wrong forum...

Interesting response, you said it; I am asking for your reasoning and justification and the your answer; which approach is working best and why do you believe that to be the case?

**Alsacien** · 20-01-2012, 20:33

Originally Posted by bokkatankie

Interesting response, you said it; I am asking for your reasoning and justification and the your answer; which approach is working best and why do you believe that to be the case?

Well think about it, what impact has the proportionally very large amount of BofE QE had, what has changed, what has not changed.
Think about what impact the ECB 3 year LTRO has had at this point, what has changed, what has not changed.

**bokkatankie** · 20-01-2012, 20:40

Originally Posted by Alsacien

Well think about it, what impact has the proportionally very large amount of BofE QE had, what has changed, what has not changed.
Think about what impact the ECB 3 year LTRO has had at this point, what has changed, what has not changed.

3 Year LTRO appears to have shifted cheap debt to banks which in turn has been used by banks (via deposits with the ECB, at rates which are not going to cover the cost of borrowing, work that one out!) to bolster balance sheets, it has done nothing for growth and nothing to end the crisis.

Lending to the consumer and small business has not increased, and where lending does take place it is at rates and costs (and new rules, which you yourself complained about) that are simply unjustifiable (unless, of course, you work for a bank).

I am not a fan of QE but LTRO is simply window dressing; it gives the appearance of activity without actually changing anything.

**Alsacien** · 20-01-2012, 21:02

Originally Posted by bokkatankie

3 Year LTRO appears to have shifted cheap debt to banks which in turn has been used by banks (via deposits with the ECB, at rates which are not going to cover the cost of borrowing, work that one out!) to bolster balance sheets, it has done nothing for growth and nothing to end the crisis.

Lending to the consumer and small business has not increased, and where lending does take place it is at rates and costs (and new rules, which you yourself complained about) that are simply unjustifiable (unless, of course, you work for a bank).

I am not a fan of QE but LTRO is simply window dressing; it gives the appearance of activity without actually changing anything.

The banks depositing at the ECB are not the same ones that really made the most of the LTRO - but you cannot reasonably know that.

QE simply has not worked yet in terms of generating growth, but that is down to the global economic climate more than anything else. It has kept government borrowing costs low, which is good as they are still rising and the government need time to turn that around. It is not nice, but its better than going to the IMF....
The SLS and QE measures did not stop UK banks from needing government bailouts.

The longer term LTRO was primarily aimed at ensuring banks had enough liquidity, the interbank lending market has dried up, so the ECB enhanced their role in it. This has worked, several banks with capitalisation needs that looked hard to meet are now off the danger list. Interbank lending is still not happening, but that was anticipated.

Measuring growth and increased lending over a few weeks is clearly not possible, however knowing that interbank lending was unlikely to start happening quickly, the logical assumption is that the money will be put to work, and it has been with many indicators up this week, some massively. There is good reason to anticipate that a bank without capital needs being met was unlikely to lend, one without such concerns and good borrowing rates guaranteed over a known period will. SME loans tend to be less than 24 months, thus the 36 month LTRO.

Overnight deposits and the analysis thereof are a different issue, probably deserving a thread in its own right.

I will say again for the umpteenth time, monetary policy cannot resolve a fiscal policy problem, it can only mitigate the impact and allow time for the decision makers to sort their lives out.