The ECB reported yesterday that it “successfully†purchased €60 billion in bonds in March, meeting its goal under the new QE program. Mainstream finanshill media headlines repeated the “Success!†mantra. However, a closer look at the ECB’s balance sheet data suggests that perhaps that “success†was a hollow one. The balance sheet did expand by €116 billion in March, but €97 billion of that was via a new TLTRO (Targeted Long Term Lending Operation) takedown on March 25. Apparently a net gain of only €19 billion came from the outright asset purchases. That’s because approximately €41 billion of weekly MRO (Main Refinancing Operations) and regular LTRO loans were paid down.
19 billion is barely a rounding error on the ECB’s €2.2 trillion balance sheet. It certainly won’t get the ECB to its goal of growing the balance sheet by a trillion. Nor will 100 billion in quarterly TLTRO, even assuming that the use of that program won’t continue to decline.
I have warned since the announcement of this latest iteration of QE that the banks very well might use the cash to pay down outstanding debt to the ECB. That appears to have happened in March. Banks historically have used funds from ECB long term lending operations to fund carry trades.The TLTRO cash is likely to be used to purchase US Treasuries or other safe securities in a carry trade. Banks are eligible for TLTRO funds as long as they meet minimal targets for loan growth. The ECB effectively has no control over what the banks do with the funds.
As with other central banks’ QE programs, the funds essentially only inflate asset price bubbles. It’s a simple case of too much printed money each month chasing a relatively slower growing pool of assets. Wall Street shills call it “appreciation†or “multiple expansion,†but it’s really just a manifestation of inflation, one that conomists ignore.
