It’s Snowing Euros in Frankfurt

12/22/2011 7:30 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

This week’s huge credit giveaway in Europe amounts to another reprieve for self-defeating policies, writes senior editor Igor Greenwald.

Frankfurt, the global capital of hard money and harder heads, dispensed $645 billion in exceedingly easy credit yesterday.

It wasn’t quite a free-for-all: you had to be a European bank to borrow as much as your increasingly dubious collateral might support for the next three years, at a variable rate currently at 1% and headed lower alongside the economy.

The European Central Bank’s Long-Term Refinancing Operation drew 523 banks, many of them getting squeezed out of the global money market.

Top French officials have been publicly urging the banks to plow the loan proceeds into government bonds, and French and Spanish yields had already plunged in anticipation of that trade. But Italy, which faces a heavy refinancing slate right out of the gate in 2012, has seen much less relief.

Instructions from Paris notwithstanding, the money’s more likely to be set aside against the banks’ own big refinancing needs next year. Yesterday’s haul amounts to 63% of the bank debt maturing over the next 12 months, according to Goldman Sachs. With another all-you-can-eat three-year borrowing buffet scheduled for January, the banks could cover themselves for all of 2012 and 2013 in short order, according to Goldman.

This is probably not enough to avert further credit contraction, but does limit the risk of a sharp escalation in the ongoing run on European banks. And if Spain’s reprieve is for real, the European borrowing backstop set to go into effect in January is probably big enough to see Italy through the spring.

With fiscal policy still dragging Europe into a recession, things aren’t likely to get better, of course. But the ECB’s generosity to banks does offer some insurance against the worst-case scenario.

Is that enough for a meaningful risk rally? There’s the argument that taking the worst case off the menu was all it took to heal US markets in 2009, so why not Europe in 2012?

The counter-argument is that in 2009 the US fiscal policy was at least pointing in the right direction, while Europe continues to make matters worse with austerity.

Doing just enough to stave off a calamity will work until it doesn’t, with predictable consequences. It’s hard to get too optimistic while uncompetitive European economies are forced to deflate as best they can, even with all those euros falling from the sky in Frankfurt.

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