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« on: February 09, 2012, 07:51:02 PM » |
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The geniuses at the ECB have figured out a way to have their cake and eat it, too: unlimited liquidity provision, but to banks, not to governments, with the critical insight that banks will use that unlimited liquidity to buy government bonds at the short end of the yield curve. You see, if you are afraid of running out of liquidity in a month, you're going to be dumping everything, especially stuff that's risky. But if you're guaranteed unlimited loans for 3 years, then suddenly those 5% or 7% yields on Spanish or Italian bonds look enticing, because you can hold to maturity-- you're confident you'll still be around in 2 years-- and make a hefty return even if the asset price fluctuates in the meantime. And if other banks are thinking the same way, your decision becomes a self-fulfilling prophecy, a sort of virtuous cycle of positive liquidity, instead of the reverse that you see in a panic.
Italian 2-year yields are at the lowest level since June 2011. Spanish 2-year yields are at the lowest level since November 2010. Irish 2-year yields are at the lowest level since November 2010. That's even more impressive given that Ireland is one of the smaller countries like Portugal and Greece that could have conceivably been let go.
Of course, this doesn't resolve the fundamental imbalance, but it at least gives politicians some time to work on whatever Germany decides.
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