December has brought another acronym to the rescue kit of European policy makers in the form of the ECB’s Long Term Refinancing Operations (LTRO), the arrival of which has been heralded by at least some market observers with a sense of cautious optimism and hope. So, with a full allotment of €489.2bn to 523 bidders, clocking in at the upper range of analyst expectations, where do we stand today as we look forward to 2012?
In sum, it is my view that those looking for LTRO to accomplish what the summit of December 10th did not are likely to be disappointed. Before reviewing the specifics of LTRO and the extent to which it changes the situation of the European financial infrastructure, let’s briefly discuss the other avenues through which relief may or may not be possible:
While the headline €750bn figure highlighted by the Euristocrats in their presentation of the summit agreement is at first glance impressive the substance of the program is highly problematic. What was needed was enough money to credibly demonstrate that Europe could buy itself the time necessary to make some very difficult decisions. Having wasted earlier opportunities, the commitment required has likely grown after countless 'final solutions'. A a number above €1trn (and probably closer to €2trn by some estimates) would perhaps have signaled that Europe has the intention and the ability to defend its financial system for at least the coming year. In the end, a sizeable chunk of the committed capital would likely prove to be unnecessary but the important task of halting the reflexive self-fulfilling collapse of confidence would have been accomplished. Instead, we have for the time being an amount unable to cover even a fraction of the sovereign issuance that is on the table for 2012. Even had the financial commitment had been credibly adequate, the ultimate success of such a response remains contingent on timely, genuine structural reform of the European system.
