As there are no exit polls of European bankers on why they borrowed money from the ECB at a 1% cost for three years, we can only guess. Compared with 523 banks taking 489b euros from the ECB in Dec, 800 banks borrowed 529.5b euros. The quantity was about in line with expectations and of course little changed with the 1st one but the amount of banks tempted by a 1% borrowing rate rose by 53%, also enabled by a reduction in the quality of collateral accepted by the ECB. The question going forward for the markets now is will it be a sell on the news, not just for equity markets but especially for the debt of Italy and Spain, still the two countries Europe needs to fully ringfence. At least for the initial reaction, Italian and Spanish bonds are rallying again with yields lower and the European bank index is higher by 1%, back to Friday’s close. With Draghi’s job now done for a while as there are no more LTRO’s on the docket and interest rates will likely stay at 1% next week, Bernanke takes the economic/monetary policy stage at 10am. I expect him to cover all his tracks and thus don’t expect anything new of interest.
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