Nuclear-Quantity Medicine
Research for Online Investors

12/21/11

The European Central Bank (ECB) opened the spigots this morning on cheap euros, and European banks gobbled up $637 billion dollars on new three-year terms.  The amount exceeded all estimates, with most traders expecting $400 billion dollars in demand.  This was the largest one day action in the market by the ECB in its history.

Italian banks took $130 billion dollars of long-term loans.  Reuters reports that EVERY Spanish bank took money from the ECB in the new program, perhaps as much as $130 billion dollars also.  The loans are at the published 1.0% interest rate, but can adjust up and down over the term. This is much less than the interest cost banks were incurring in the open market.  For some banks it will mean savings of three percent or more.

Banks were allowed to switch some of their shorter term loans into the three-year paper.  Loans made in October were allowed this option, with prepayment allowed after just one year.  The ECB had $670 billion in loans to banks on their books prior to this morning’s market operation.

With the exchange of shorter term loans for the three-year loans, the net effect of today’s operation increased liquidity by $260 billion according to an analyst at Royal Bank of Scotland.

The economics editor at Sky News called the ECB’s move “doling out nuclear-quantity medicine to the eurozone.”  Many of the eurozone economies are slowing and Mario Draghi encouraged banks to take the money.  Reuters reports Draghi feels the bond market could raise bigger concerns next year.  Italy must borrow or roll over almost $200 billion dollars in the first quarter.

Futures for the market this morning were positive, then moved negative by market open.  The problem for the eurozone is the same for the U.S.  Liquidity does not equal solvency.  Banks look to be awash in money after this latest Central bank operation…but are they solvent?  Will countries continue enacting austerity measures if their interest rates moderate?

We only have to look at the U.S. to know the answer.  While our budget is wildly out of balance, the Fed has kept interest rates low.  President Obama and Harry Reid are beating the Republicans to death over cutting Social Security taxes.  Do they take our debt seriously?

Sadly, the problems will not be addressed until interest rates start climbing and the fallacy of deficit spending to make promises with other people’s money is stopped.

Quote:
It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.-- Thomas Jefferson

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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