STOCK MARKET WATCH -- Thursday, 1 March 2012

[Demeter]

45. MORE THAN YOU EVER WANTED TO KNOW ABOUT: LTRO II

http://www.macrobusiness.com.au/2012/03/ltro-ii/

...Interestingly, the number of institutions using the facility was up from 523 to 800. Of course, as with stage 1, the question is what the banks will do with the additional liquidity, and what effect it will have on the markets and the real economies of Europe. If stage 1 is anything to go by then we will see a broad rise in all markets, but a deleveraging in the real economy. However, it must be noted that this was always going to be at least a two stage operation and therefore the banks always knew they had a second bite of the cherry coming. Given that it is not clear whether there will be another round of these operations, the behaviour of these institutions may change in response to this second round of money. Obviously that behaviour will flow on to sovereigns, and one of my outstanding questions of these operations is: What happens after February given that banks now have less incentive to purchase sovereign paper over other assets?

What is clear is that the European banks still have a long way to go in order to meet their capital requirements under Basel III, which means we are likely to see a continuation of the “credit crunch” dynamics in the periphery, and therefore a continuation of the financial stress in the European system.

As I mentioned again yesterday, I am concerned that Portugal is well on the way to becoming the second Greece and action in the bond markets overnight suggests concern is spreading about the long term viability of the country.


....We already know that Ireland is to hold a referendum on the fiscal compact, but that is not the only push back occurring. It also seems, I assume under some steerage from the likes of Mario Monti, that Spain is joining in:

A push by Spain for more leeway in meeting its 2012 budget deficit has opened a rift between the European Commission and several EU member states, with the Commission adamant that countries’ targets should not be relaxed, senior EU officials said.

Spanish Prime Minister Mariano Rajoy is hoping major EU states will back him at a summit on Thursday and send a signal that Madrid’s target of cutting its deficit to 4.4 percent of GDP this year should not be binding.

Spain said this week its 2011 budget deficit was 8.5 percent of GDP, substantially higher than previously expected, making the 2012 target all the harder to achieve.

But the Commission, which is responsible for overseeing euro zone budgets, is not willing to show flexibility, at least until Spain explains why the 2011 deficit was so much higher than expected and puts forward new austerity measures.

“We are not talking about giving more flexibility to any member state when it comes to fulfilling commitments,” Commission spokesman Olivier Bailly reiterated on Tuesday.

But two senior officials told Reuters that Germany, France, Britain and a handful of other countries were supporting Rajoy’s push for a softening of the 2012 target.