3-Year LTROs – A First Assessment of a Non-Standard Policy Measure

This paper provides a first preliminary assessment of the recent two 3-year long-term refinancing operations (3Y LTROs) conducted by the ECB by putting them into a broader context. The perspective taken is that prevailing in the first half of the year 2012, directly after the path-breaking ECB decisions were made. The main aim of the paper is to convey an impression of the – not overall positive - general assessment of the LTRO measures which finally led to the implementation of an even more heavily debated unconventional monetary policy measure: the announcement of the Outright Monetary Transactions (OMT) later on in 2012. It should thus serve as a contemporary document. For this purpose, we look first at the risk of losses for the ECB and try to assess inflation dangers stemming from the 3Y LTROs. In the same section, we also look at the effects of LTROs on real activity and government bond yields and on further impacts which might well consist of distorting the interbank and the capital market in the euro area. We then investigate potential side-effects of the LTROs such as the effects on the real economy and on sovereign bond yields via the so-called Sarko trade and the increasing dependence of national banks in the euro area on ECB funding.