What LTRO effects can it bring?

Recently, number of important policy-makers and financiers said the credit crunch could continuous engulf the global financial market liquidity, which triggered a wave of instability in the world. After credit crunch contributed to the US properties decline, house prices are still falling in the US and reducing the value of mortgage loans at the same time. Thousands of property owners so far face climbing up interest rates, when their introductory periods has ended, the interest rate will extend to the regular annual percentage rate (APR) normally is customarily higher than the introductory rate to face their terrible ballooning mortgage payments. In 2007, the US had to increase the interest rates base upon upbeat inflation. Much of new homeowners initially could not afford the mortgage payments in higher interest rates. A nearby disaster recession in the US and global slump could cause by US subprime mortgages bubble burst. It can be easily triggered by the bankruptcy of Lehman Brothers hit of all countries of the Eurozone, this is expected to only the Eurozone’s weakest economies will fall into recession. Besides that, many Asian countries rely heavily on foreign banks for financing, either as cash-strapped foreign banks to cut lending, or raising the loan price, there will be the possibility of a credit crisis. According to the Bank for International Settlements (BIS) the second quarter of 2011 data stated that $ 2.52 trillion cross-border banking loan in Asia (not including Japan) in outstanding loans order, of which 21% from continental European banks.

Banking is a traditional credit provider by buying a large number of government bonds from the government to peer through the inter-bank lending and to provide credit to all types of businesses and individuals dilute the risk of itself. Banking like a gear wheel which necessary parts to make sure economic machine running well. In 2011, the demand for bank financing is stronger than expected. The European Central Bank was announced €489bn fund provided its response to the Eurozone credit crunch issues. The enthusiastic response from banks was initially welcomed by the policy, the euro and the stock market rallied by surging hope this will help to support the banks’ balance sheet stretched. However, the subsequent enthusiasm faded. Can this three years unprecedented level of longer-term refinancing operation (LTRO) loans help comes ahead of a crucial first quarter of 2012 balance sheet due to a large number of banks and government debt become expire?

First of all, market participants hard to finance from the markets, this is the result of a common increase in risk aversion. Prevent the substantial contraction of bank debt market financing by the central bank financing instead of bank debt contraction will lead to seek mitigation bank financing difficulties, and may even exacerbate the credit crunch.

Secondly, most of the measures in these plans lack credibility. The banks had about half of the 442 billion euros (€530bn) in June 2009, for the purchase of sovereign debt yields higher, much of Greece and Spain bonds did not solve the problem of credit crunch. Banks may become over rely upon easy access to central bank funds and indefinitely postpone the adjustment to drive the Eurozone into a deep recession have been weakened by the Eurozone’s worsening sovereign debt crisis. Thus, the cheap three-year financing makes the Eurozone commercial banks have no incentive to rebuild its the capital foundation. Unless, the banks will only seems central bank funds only as a temporary saviour. No incentive to actively and in fair competition base on the pursuit of self-reliance.

Even though ECB hope to reduce systemic risk of liquidity and attempted avoid a credit crunch. But, this hot money will trigger vicious circle affect the banks' profits continued to downturn, and therefore more difficult to attract investors. Finally, in turn, lead to increased borrowing costs for banks.