another look at the LTRO

The initial rate on the 3 year LTRO was reported to be ‘fixed’ at 1%, but turns out it adjusts with the policy rate and will be an average of the policy rate over the three year term.

So it doesn’t fix rates for the banks, it just ensures funding at the policy rate. Which makes sense, as the bank’s cost of funds is the policy instrument of the ECB.

Also interesting is how in the case of bank defaults the member nations guarantee the bank deposits. But those member nations get their funding from bond sales. And with the weaker ones that means bond sales to the ECB. So in that sense, the ECB is backing bank deposits. Which means when it provides liquidity and takes collateral, should the bank subsequently realize losses, causing the ECB to realize losses on the funds provided to the bank for liquidity, the member nation would then sell bonds to the ECB to get the funds to pay for the loans it got from the ECB.

Again, it all comes down to the ECB writing the check. And it all works from a solvency point of view when the ECB writes the check. And the ECB writing the check introduces a serious moral hazard issue. Hence the (over) emphasis on austerity.

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6 Responses to another look at the LTRO

  1. RSG says:

    I would assume they leave the policy rate at 1% for the duration of the LTRO.


  2. Ramanan says:

    “And the ECB writing the check introduces a serious moral hazard issue. Hence the (over) emphasis on austerity.”

    First time I have seen this around here! How does this compare to simple “proposals” to write cheques and/or simply putting ceilings on yields? (i.e., without any mention of other important terms and conditions)

    Even Mervyn King understood this long back!

    It’s just the beginning – there’s more such as wage negotiations. Already happening with the IMF trying to deflate demand (sadistically) and as a byproduct deflating wages somewhat – but will soon happen more openly (i.e., wage negotiations for whole regions) for the Euro Zone to survive.



    the moral hazard issue has always been front and center, particularly in regard to the euro zone and their rules of the road.


    Luigi Reply:


    King talks about “moral hazard” in the case of ECB purchase of sovereign bonds, the situation now is different, at least in Italy (I don’t know if it is a general decision in EMU) where Treasury guarantees banks bonds, that bank use with ECB.

    the logic, at least in Italy, is that ECB use LTRO to refinance banks, that use collaterals (in particular bank’s debt) guaranteed by the Treasury. it goes beyond “moral hazard” and enters the area “mockery” given the EMU institutional arrangement.


    Luigi Reply:


    ok sorry Ramanan, I’ve read now your blog.

  3. Charles Hayden says:

    Hey Warren, I’m occupying Buddy Roemer’s social media accounts. Check out his page answers sections ( Joe Firestone (letsgetitdone) and I have confronted the candidate with MMT. And he’s responded, although it wasn’t quite what we wanted to hear.
    Anyways, I need reinforcements. I should not be the one to have to do this. I’m more of a political guy. I’ve spent the last year trying to understand MMT and its implications, but I’m not up to speed on everything. But there’s an opportunity here. What I would like to see is a wave of MMTers bearing down on Roemer’s social media accounts. He should consider himself Occupied by MMT-Progressives. He calls himself a “Conservative who listens.” And we need to speak and hold him to that.

    Thank you Warren for all that you’ve done to teach people about the US dollar account. You should be the Treasury Secretary of the United States of America. You are a national treasure. And we need your help and leadership on this most important mission.

    Deficit Owls United!
    Campaign Finance Reform Now!
    Occupy Everything!


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