My friend Anatole Kaletsky wrote a cogent note, and I will excerpt a few parts. Some see what is happening in Europe as a move toward fiscal consolidation. I see the project as moving the risk to where it can be managed in case of a break-up, thus making the break-up easier and less problematic, something which Jon Tepper wrote about last Monday in the OTB. Here is Anatole: "From the day the LTRO was announced it struck us that its main effect would be to channel ECB money to the Spanish and Italian governments via their banks (see And Now For the Good News). By lending the banks unlimited funds at 1% for three years banks, the ECB could technically circumvent the legal prohibition against monetary financing of governments and deflect the criticisms of German politicians and Bundesbankers against the Securities Market Purchase (SMP) program—whereby the ECB 'temporarily' bailed out the Spanish and Italian governments by buying their bonds. By inventing this unlimited money laundering operation and substituting it for the undersized SMP, Mario Draghi had invented a new form of QE that will soon be bigger, relative to the euro-zone economy, than the straightforward money-printing operations of the Fed, Bank of England and Bank of Japan. "We believed these banks would be indifferent to risk of a default by their own government, since in that case they would be bust anyway. Nor would they worry about a breakup of the euro, since their ECB borrowings would technically be national central bank assets and would presumably switch into national currencies at the same time as their government bonds. In short Italian and Spanish find the money laundering operation irresistible - a case of 'heads I win, tails I don’t lose'. "In comparison to the SMP, the LTRO has three crucial advantages. It effectively removes the risk of a Lehman-style banking crisis in Europe. It appears to acceptable to German politicians and the Bundesbank, even though its economic effect is exactly equivalent to monetary financing. And by renationalizing the government debt of Italy and Spain (private non-resident now holds probably 25% of the debt, vs 40/50% one year ago), the LTRO reduces the risks of a systemic banking crisis in the case of an eventual euro break-up. "To capitalise on these advantages, we believe the ECB and national regulators will encourage banks to bid aggressively again in today’s LTRO There are still 700bn euros of Italian debt and 170bn euros of Spanish debt in the hands of private non-resident investors – and the sooner these can be shifted into the national banking systems the better. Spain’s debt will rise by another 40-50bn this year, and Italian debt by 20-25bn. Italy and Spain are both in recession and their needs for monetary financing are likely to increase, rather than decline." (no attachment)