Second Verse Same as the First-LTRO Carry Trade Not What ECB Anticipated

Just like the first LTRO in which French President, Sarkozy, said the LTRO would help banks buy sovereign debt on a carry trade (the banks pay 1% interest for a 3 year loan and in turn buy sovereign debt yielding 5% and make +4% in the process) , the second LTRO has failed in its mission according to ECB records.

Bloomberg reports 

ECB Says Overnight Deposits Surge to Record

Financial institutions parked 776.9 billion euros ($1.03 trillion) with the Frankfurt-based ECB. That’s the most since the euro was founded in 1999 and up from 475.2 billion euros a day earlier. Banks get 0.25 percent on the deposits.


Although the LTRO operation was for  $529.5 bn, after accounting for rollover payments, the true net added liquidity came to aprox. $311 bn added to the system. The ECB overnight received $302 bn bringing the deposit facility to a record $777 bn. Literally the banks are willing to pay 75 basis points to protect the cash and keep it out of the financial system, a reverse or negative carry trade (the loan is at 1%, they receive .25% in the deposit facility, so they pay .75% for the protection of the deposit facility). Some rough math means that the 800 banks that participated will collectively pay $6 billion in interest over the next year! 


So there you have it, another European solution gone awry.