Chillin' out till it needs to be funded
The issue at hand is how 800 banks were able to participate because of weaker collateral rules done on the sly by Mario Draghi’s ECB , first for collateral specific to smaller French banks and it seems another round of added securities on the collateral s that again serves the erstwhile illiquid banks in the smaller regional banks classification as the number of banks participating has increased. this simpler construction of the problem of course weakens the Bundesbank criticism in that the smaller banks are the only one expected to get to lending operations esp int he small and medium business even as bigger banks get choosy about whose loans are underwritten and approved.
Also apparently banks and investors are still not strong enough for ECB to consider Eurobonds, whose savings for the Eurozone from getting directly to investors can well be negated if these investors come back for ECB guarantees on a EUR 750 mln left in the EFSF and ESM funds yet. (FT on savings from Eurobonds) However a new interim solution, in terms of a Redemption fund, just burrowing the existing debt , being extinguished letting non South countries without a bailout package to pay out their debt like unwittingly ( at least to external observers) the LTRO allows banks to extinguish current debt without shutting down ( for lack of liquidity is not the only requirement in that case)
Also options pointing to IMF are really circular logic in that Spain Italya nd even Germany would be quite distressed in paying their own contributions to the fellas bailing them out from the IMF
Firstly, inflation cannot result from such extreme liquidity as the funds will be extinguished along with debt being repaid by the banks and as banks get a safe investment and lending window in ECB it will deflate the inflation stresses and yet save anyone from the deflation and contraction which would be a positive for global investors except for the move in Oil which has already deflated by lack of European demand..
Secondly, yes the ECB will suffer lossesw with the current flexible definitions for collateral and its own guarantees covering everything if any left int he private sector. and there in lies the rub, that ECB operations are important for the Euro citizens to regain confidence, and maybe it will plateau out Germany’s gains from the Crisis within the zone too and that is not in any way welcome for the zone.
And yes it is a disincentive for banks to restructure and an incentive instead to grow new lending, while big banks have already taken care of more than half the deleveraging and risk assets restructuring they had undertakne, more than 90% if the immediate EBA targets are concrened for the bigger banks.