¡Behold El Tro! - 29 February 2012
Or the LTRO – some €1 trillion now thundering down on Europe's banks...
EL GORDO – the fattest prize in the world's fattest lottery – just keeps getting fatter. Or so its promoters claim, writes Adrian Ash at BullionVault.
But even the fattest prize-total to date – some €2.5 billion won at Christmas 2011 – looks a real skinny-ribs stood next to El Tro, the storm of money now thundering onto Europe's banks.
This week's Long Term Refinancing Operation took the total sum of money spewed out by the European Central Bank to more than €1 trillion. Better known by its acronym, the LTR is christened El Tro by us here at BullionVault today by way of the Catalan for "thunder". Because that's just what people keep saying when they talk about it – "El Tro". And keeping Catalonia, Spain and the rest of the Eurozone all in one piece is what's led to this banking lottery.
"You can't argue with €530 billion," said one Credit Agricole analyst today, nodding at the latest El Tro prizes, which will be handed to commercial banks when the latest chunk of loans is settled on Thursday. But he should add two exclamation marks (one upside down of course) and do PR for the Spanish lottery's El Gordo instead.
Because Europe's thundering money warrants a much stronger sales pitch than that.
On just two days inside eleven weeks, the ECB has now created an extra 10% of the Eurozone's entire money supply, lending out €3,084 for every man, woman and child in the 17-nation union. Over 800 different banks scrapped for a piece of the unlimited prizes on Wednesday, over 275 more than the first time round. Even the cash raised from shareholders by all US and Eurozone banks added together during the crisis of 2007-2010 fails to match the size of El Tro's gifts.
And make no mistake: the LTRO is a gift. Even if price-inflation subsides to average the ECB's annual target of 2.0% between now and start-2015, the central bank will make a loss of €44.7bn in real terms. Inflation stuck (or pushed above) the latest reading of 2.6% would cost the Frankfurt lenders nearer €62bn...a full 6% of the €1,018 billion now lent out in total.
Any bank looking to book an instant profit meantime can simply stick the cash into 3-year government bonds and turn their 1.0% annual cost into 1.10% with Finnish debt, 1.55% with Belgian debt...or a massive 5.41% per year with Italian debt. Hell, you could buy German Bunds and make risk-free money on anything above 6 years to maturity.
So c'mon! Everyone's a winner with El Tro. Except the central bank, of course. And the banks themselves, if Belgium, Italy or one of the rest fail to make good on their bond repayments. Which the banks already have a very clear interest in avoiding, seeing how they're backed by state guarantees, whether stated or implicit.
How does one play El Tro? To get a ticket you need a banking license inside the European Union. Then the central bank pings you an email, and makes you an offer you really cannot refuse:
Unlimited loans for 3 years at a cost of 1% per year!
Last December, the prize draw totaled €489 billion. This week the cash pay-out totals €529bn. Apparently that's your lot. ECB president Mario Draghi says today's giveaway was the last. But a trillion Euros will be a lot of money to find when the loans need repaying at start-2015, even though they'll no doubt be worth much less in real terms. We wouldn't bet against a new offer – and with fatter prizes – in the next couple of years. Anyone wanting to bet on it might think Buying Gold or silver a smart move. But they'll likely need nerves of steel, especially at first.
Just as with US and UK quantitative easing, buy-the-rumor, sell-the-news also applies to Europe's LTRO. Gold tumbled more than 3% on Wednesday, and silver slumped almost 9% at one point, despite the biggest 1-day deluge of money ever seen in history so far. But such volatility is to be expected, we're coming to learn. Trying to fatten the money supply of the world's largest economic region by 10% in one morning is sure to make everyone queasy. And net-net, quantitative easing and El Tro look very similar. The aim looks exactly the same.
Money is handed to banks on terms they wouldn't dare have imagined pre-2008. Officially, the plan is to boost lending to small businesses. The central banks all promise that this cash injection is only temporary (3 years for LTRO, undated for QE and clearly indefinite in the case of Japan) and will be withdrawn in future. A good chunk of it winds up in government bonds. Very little, if any, reaches what TV news anchors calls the "real economy".
"This money doesn't simply stay in the deposit facility," claimed Mario Draghi, ECB president, at his January press conference.
"This money circulates in the economy."
Yah-boo to you! replied Bank of England governor Mervyn King to UK politicians in London today.
"The idea that the long term repo operations have eased the supply of finance to small businesses in the Euro area is a myth. What it has done is to provide a source of funding to banks particularly in the southern member countries of the Euro area which were experiencing a bank run, enabling them to fund the withdrawal of funds."
Note how our Mervyn – quack! quack! – didn't say the loans were a round-a-bout way of keeping Spain afloat, even though Spanish banks – heavy players of El Tro the first time – accounted for 97% of the increase in Eurozone government debt held by all Eurozone banks in the 3 months to Feb. Because note too that, by the end of next month, the Bank of England itself plans to hold one-third of all UK government bonds in issue.
Pot, kettle and all that. And just as with the US Fed and Bank of England's never-ending queasing, so the ECB's unlimited loans look likely to become a permanent and regular feature for gambling fans.
Get your tickets early and often.
Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, Adrian Ash was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern and FT Deutschland; Italy's Il Sole 24 Ore, and many other respected finance publications.