Europe’s Second Cash Injection of Cheap Money

29 Feb

In December 2011, the first mass injection of cheap money into the European banking system from the European Central Bank was seen as a major success. This helped fuel the market rally at the end of 2011 into 2012; and the markets have opened higher on the expectation that the results from the second installment will be successful again.

Estonia Using Euro

 
 

 

 

 

 

 

 

The first time around, the market did not initially appreciate how popular this three-year term refinancing operation (LTRO) would be .

With the second round, there are a several central questions to be answered:-

  • How Big Will It Be? The estimates suggest 400 Billion Euros and this would be seen positively by the markets
  • How Much of the Total Sum Is Actual “New Money”? Analysts are predicting up to 300 billion will be new liquidity.
  • How Will It Affect Markets? Immediately after the LTRO, a large takeup by European banks should help boost the recent risk rally in stock markets, which is hoped could help bolster the recovery around the world, in the longer term.
  • How much of this money makes it into the Real Economy? If banks choose to lend it, or to buy sovereign bonds, they could help struggling Eurozone economies and bolster the productivity of SMEs (Small and Medium Sized Enterprises). Otherwise, I fear it will merely postpone the Eurozone’s troubles but for how long? 

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