More banks than expected tapped into the European Central Bank’s second three-year LTRO (long-term refinancing operation) today. The ECB allotted a sum of 529.5 billion euros to 800 euro zone banks. This total loan amount exceeds the first LTRO amount when 489 billion euros were allotted in December last year.
Under this LTRO, banks will receive three-year loans at a cheaper refi rate of 1 percent. It is expected that this operation will boost liquidity and ease concerns of a credit crunch, and aims to boost investor risk appetite. It is hoped more credit will flow to businesses.
The euro initially jumped against the dollar after the LTRO results, with EURUSD briefly hitting 1.3475 but then dropped down to 1.3424 moments later. Gold rose to $1,790.42 but then gave up gains and fell to $1,780.61.
Markets had already priced in the LTRO operation this week, and the euro as well as many other risk currencies had been rallying sharply in the past couple of days, boosting risk appetite. Today investors are taking the opportunity for profit.
There is speculation that the ECB wants this LTRO operation to be the last one, as it is worried banks are becoming too reliant on ECB funds and want euro zone governments to take on more responsibility to tackle the debt crisis.