The ECB cash for collateral swap, as part of the LTRO and totalling some €209.9bn, would have occurred some time in the last 24 hours. So far there hasn’t been any positive movements in the places that matter.
Spanish and Italian bond yields crept higher on Thursday and underperformed German debt as markets grew sceptical that banks would use funds borrowed from the European Central Bank to buy lower-rated government bonds.
Banks borrowed a huge 489 billion euros from the ECB at an unprecedented offer of three-year loans on Wednesday, which some had expected to be reinvested in Spanish and Italian debt and help ease borrowing costs.
But, those looking for an immediate boost to Italy and Spain were likely to be disappointed. Traders said the preference was to reinvest some of the funds into safe-haven paper rather than pick up the higher yields on offer from some of Europe’s more troubled states.
“What happened yesterday is not a silver bullet to the crisis… but it is too soon to see the impact yet,” said Niels From, strategist at Nordea in Copenhagen.
“Even though we haven’t really seen outperformance in Spain and Italy since yesterday, I still see the auction as supporting those two countries, but I don’t see this causing a major spread narrowing.”
The 2,5 and 10 yr Italian yields are all higher this morning but are still down from record highs.
This is not a good sign given the already expected positive impact of the LTRO changes and also what has occurred overnight in the Italian senate.
Italy’s Senate passed a vote of confidence in the government of Prime Minister Mario Monti on Thursday that put the final seal on an emergency austerity budget rushed through to restore market confidence in the euro zone’s third biggest economy.
The upper house voted 257 to 41 for the government, following a similar easy win in the lower house last week.
Monti, said he was happy with the vote and Italy could hold its head high in Europe after passing the package of spending cuts, tax rises and pension reform.
The budget is intended to reverse a collapse of market confidence which has pushed Italy’s borrowing costs to untenable levels and put it at the heart of Europe’s debt crisis.
It would appear that the markets are unconvinced by the latest package. Given the outcome of Greece, Portugal, Spain and Ireland maybe that isn’t a surprise, but it certainly is a concern because the entire premise of the changes in law are:
Mr Monti’s national unity government believes that the recessive effect of the measures, estimated at about 0.5 per cent of GDP over the next two years, will be offset by a reduction in Italy’s borrowing costs and longer term gains in economic growth
I have talked many time previously about the need to address productivity and the existing debt burden before embarking on austerity otherwise the outcomes are likely to be the opposite of what Mr Monti describes. Given that I can’t see anything in this package that addresses those two fundamental points this just looks like another misguided attempt to do something based on the idea that taxing people more somehow leads to economic growth when the real problem in Italy’s case appears to be the strength of the currency.
It looks like 2012 is going to be a tough year for the Italians.
Merry Christmas and a Happy new year to all my readers.