LTRO-2 - Diminishing returns ::Edelweiss, PDF link

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At EUR529bn, LTRO-2 is higher than LTRO-1 (EUR489bn) though its firepower is likely to be limited compared to LTRO-1, which brought about a dramatic improvement in the outlook of EU banking sector. Besides, the upside from LTRO-2 has largely been priced in. The situation is similar to Fed’s QE1 which was quite successful in curbing risks in the system, but QE2 suffered from diminishing returns.  From an economic perspective, ECB’s primary liquidity (injected via LTRO) is not getting translated into broad money growth, reflecting dysfunctional monetary transmission. At the same time, LTROs are happening against a backdrop of severe austerity measures across Europe as opposed to QE1, which was well complemented by global fiscal stimulus. Therefore, we expect the economic situation in Europe to deteriorate despite LTRO-2. Besides, there is a lack of positive trigger on the liquidity front in coming months and with national elections due in Greece and France (April-May), political situation seems far from certain. Therefore, it may not be long before markets turn attention to these issues.

LTRO-2 - Diminishing returns