This week looks set to be yet another busy period for Europe with the highlight due on Thursday as the ECB conduct their second Long Term Refinancing Operation. There has been much speculation over this second tranche of cheap credit, with many analysts noting that they do not expect a third round of tender after this week, unless there is a significant deterioration in the European crisis. Some senior ECB members have further commented upon this, with Weidmann and Nowotny stating their confidence that further three year operations would be unnecessary.
Most analysts are expecting the take-up of these loans by European institutions to be around the EUR 300-400bln mark, but it is worth noting that there are some significant outliers, with some even estimating the total amount to be up to EUR 1trl. There were reports earlier in the year of take-up being far higher in the second round, due to the receding stigma placed on European Banks using the cheap credit. Should the take-up be around the expected EUR 400bln, this will increase the ECB's open market operations by around two-thirds, a significant jump.
Should the take up of the LTRO be high, we are likely to witness further credit easing across Europe, reflected primarily in Euribor fixings, but gradually filtering through to other aspects of the economy, including bond auctions, business lending and investment. This will act as a strong jolt across the board, with risk appetite likely across the European bourses.
However, the upcoming LTRO should not be viewed as a conclusive fix for the Eurozone's credit issues, as there are some severe downside risks that may occur following the operation. Some critics have highlighted that this monetization of government debt is relieving these institutions from implementing what is truly needed - economic adjustment programs and reform. Others have pointed out that this issuance of easy credit is allowing the poorer, struggling banks to prop up their balance sheets and grow them in some cases, allowing the companies to avoid adjustment processes that may be necessary in the long run. Participants who lean towards the more pessimistic side will see this operation as a quick-fix for a far more long-term problem.
Following last week's tepid market reaction to the confirmation of a Greek bailout deal, participants are still wary of reports from German lawmakers and politicians who are not ruling out further bailouts for Greece, with the interior minister for Germany even recommending the country to leave the Eurozone. Further comments are expected as various European countries debate and vote on the Greek bailout this week.
On Monday, Eurozone money supply figures are set to be announced, showing the first figure since the ECB's first LTRO. This follows data from November and December that indicated an imminent credit crunch, including the largest-ever contraction in loans to non-financial corporations. This data will give the markets further evidence on whether the first tranche of lending succeeded in staving off the negative effects of credit constriction. In other news from the UK, the upcoming expiry of the stamp duty holiday has pushed up the demand for housing in the short-term, however momentum in these markets remains weak, stabilizing towards the lower end. These effects are likely to be reflected in UK housing data due for release this week.