LTRO

On its face, the ECB's Long-Term Refinance Operation (LTRO) seems to be a blessing for troubled Eurozone financial institutions, especially when used in conjunction with the classic "carry trade" concept. At a high level, the banks would have access to cheap liquidity (borrowing at the 1% benchmark rate), which, in turn, would be used to purchase higher-yielding sovereign debt (anywhere between 500-700bps for Spain and Italy based on recent levels). Not only would the banks pocket the delta (approximately 400bps) as profit, but also the peripheral nations would benefit from increased demand at sovereign auctions. In addition, the sovereign bonds could be used as collateral for access to the ECB's cheap lending facility, thereby reinforcing the positive feedback loop.