This week comes the second and quite possibly last ECB 3-year LTRO, a scheme that allows Eurozone banks to pledge a wide variety of assets in exchange for cheap funding/liquidity.
The first LTRO, carried out in mid-December, is widely credited for having stanched the crisis, as banks used cheap liquidity to buy up sovereign debt with juicy yields.
The apparent success of the scheme initially lead people to conclude that the current LTRO would be even bigger, but since then, expectations have been tamped down quite a bit, and right now the betting seems to be that this one will be a bit smaller.
SocGen has a roundup of how banks — through media reports and publicly stated intentions — intend to use this operation.
The big beneficiary? Probably italy:
Those in favour – Bankinter, all Italian banks At the other end of the spectrum, we expect all five Italian banks under our coverage (Intesa, Unicredit, Popolare, MPS and UBI), Mediobanca and Bankinter to participate in the 28-29 February LTRO and to do so specifically in order to engage in the carry trade by buying sovereign bonds (in varying degrees). Bankinter stated at their Q4 11 results that they were ‚in the process of building out a specific portfolio of government bonds‛. Most Italian banks are yet to report Q4 results, and therefore typically have not made official comments, but it has been widely reported in the press that the banks are likely to engage in the carry trade to some degree.
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