Wait, How Much In LTRO’s?

Not implied in the name, LTRO’s are indeed collateralized as are every one of the various refinancing programs; these are not unsecured transactions if only to feign deference to Bagehot. In this way, the ECB by reducing collateral thresholds attempted to provide funding the euro repo market disastrously would not. In late 2011, that market hadn’t much desire to accept Club Med sovereign bonds, especially the seemingly infinite mass issued by Italy.

What is implied by the name is their maturity, or tenor. These are long-term financing arrangements, typically just a shade over three years (1099 days) in length. Since collateral pledged to the NCB’s in order to participate in the ECB’s LTRO’s is locked away, no longer reusable, giving up any considerable amount comes with unappreciated collateral costs.

If, of course, the collateral being put up to the NCB is ridiculous junk, so much the better. For better quality collateral posted, maybe there’s going to be a time when the banks would rather have it back – if function in the dynamic private market comes back.

Fortunately, or not, the ECB in its initial 2011 specs provided a close-out provision which gave banks the opportunity to repay some or all of their outstanding loans after just one year.

The first two LTRO’s, one late in 2011 with the second following closely in February 2012, together tallying up to – at the time – a monumental near-€1 trillion in “liquidity.” One year later, early 2013, European bank participants clawed roughly €140 billion back.

Commentary was divided on what this level of repayments might have meant. Were these supremely confident banks no longer requiring such massive assistance? Should the world have been disappointed more, a lot more, wasn’t taken back? Where did the collateral provisions and the insinuated condition fit into all this?

None of those questions were adequately answered because, 2013, happy days were then again – at least that’s what everyone said. It did not, of course, actually work out that way. Those long ago LTRO’s were quickly and so easily forgotten, replaced in 2014 by T-LTRO’s before eventually Europe’s QE(s) in 2015.

The LTRO’s have made their reappearance in Europe again beginning in March 2020 – when else? The first operation was a relatively modest €115.0 billion bid on by just 114 bank counterparties. The term was the typical 1099 days, the charge for the funding a zero basis point spread to the MRO (set at zero).

For March 2020, that was kind of a dud. Global Financial Crisis 2, embroiling Europe as much as everywhere else, and in euros with another 2011-style rescue on offer just 114 bidders showed up for a rather paltry €115 billion.

Perhaps coincidentally, though probably not, on April 22, not even a full month later, the ECB changed its collateral eligibility requirements once again to include even more junk-y junk backing its various refinancing operations; including LTRO’s and their longer maturities.

The next one was set for June 24 and – just coincidence? – huge difference: even though GFC2 by then was supposedly several months behind the world, suddenly there were 742 bidders taking up €1.31 trillion. Same terms as before, 1099 days at zero spread above the same MRO.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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