Last month, Euro­pean banks tapped the ECB for €489bn in a long-term refi­nance oper­a­tion dubbed LTRO. On Feb­ru­ary 29, another round of LTRO is com­ing up and expect banks to go for the gusto. Banks like cheap money to spec­u­late and that is exactly what they will do.

The Finan­cial Times reports Banks set to dou­ble cri­sis loans from ECB

Euro­pean banks are prepar­ing to tap the Euro­pean Cen­tral Bank’s emer­gency fund­ing scheme for up to twice as much as the ECB sup­plied in its debut €489bn auc­tion last month, pro­vid­ing fur­ther evi­dence of the sector’s liq­uid­ity squeeze.

Sev­eral of the eurozone’s biggest banks have told the Finan­cial Times that they could well dou­ble or triple their request for funds in the ECB’s three-year money auc­tion on Feb­ru­ary 29.

“Banks are not going to be as shy sec­ond time round,” said the head of one euro­zone bank at last week’s World Eco­nomic Forum in Davos. “We should have done more first time.”

Three bank chief exec­u­tives, all of whom asked to remain anony­mous, said they were plan­ning to increase their par­tic­i­pa­tion twofold or threefold.

Unlim­ited Money for Three Years at One Percent

The ECB is offer­ing unlim­ited money to banks for three years, at one per­cent. Banks are sali­vat­ing because the first round went well.

The money is sup­posed to go for bank lend­ing but it won't. Why should banks lend? They have a guar­an­teed profit by spec­u­lat­ing in Span­ish or Ital­ian bonds, assum­ing of course Spain and Italy do not need bailouts cou­pled with a write­down on gov­ern­ment debt.

How­ever, that's quite a risk, and in my opin­ion Spain will need such a write­down. If so, Ger­many will be on the hook once again.

For a dis­cus­sion about how futile this is, please see Pre­ma­ture Dol­lar Obit­u­ar­ies and Main­stream Econ­o­mists' Mon­e­tary Insan­ity; Keynes-Inspired Great Depres­sion; Lessons Not Learned

Money Sup­ply Will Soar, Lend­ing Won't

Don't expect the next LTRO to make it into the real econ­omy. It won't. Rather the LTRO will fuel more bank spec­u­la­tion and more lever­age in gov­ern­ment bonds. Money sup­ply will soar, lend­ing won't and this rates to be good for gold.

In the mean­time, please sing along with Bach­man Turner Over­drive (and the ECB).

Link if video does not play: Bach­man Turner Over­drive — You Ain't Seen Noth­ing Yet .

Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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