December 23rd, 2011

Strategy Review

The ECB Joins “Club Fed” (through the Backdoor)

Despite its constant protestations that it would not embark on a program of Quantitative Easing, this week the ECB has in effect started doing exactly that (well, almost exactly) in an attempt to keep the European debt crisis from spiraling out of control. The official name of the program is the Long Term Refinancing Operation (LTRO) and its official purpose is to relieve liquidity (short term funding) constraints for European banks. Officially, the ECB is definitely NOT monetizing sovereign debt, but in practice (in our view) the LTRO is a backdoor way to accomplish exactly that goal. When trying to figure out the true intentions of a central bank, the golden rule is “Don’t listen to what they say – just watch what they do”. So in that spirit, let’s ignore anything the ECB has said and instead take a look at what they are actually doing.