Since late December, the ECB have offered cheap loans to European Banks. The facility, called the long term refinancing operation(LTRO), offers 3 year loans at a one percent interest rate. The banks can then buy government bonds offering anything from 3 percent upwards.
It is a scheme, or should I say scam, where banks simply can not lose money, so long as governments don't default on their bonds. But that is to put the horse before the cart. The LTRO was introduced specifically to prevent governments like Italy and Spain from defaulting. So, any bank participating in the scheme has a rock solid guarantee that the ECB will step in and print cash to prevent a sovereign default. So the LTRO is risk free.
In order to receive the cheap money, Banks need to stump up some collateral. Naturally, European banks have handed over every crappy loan and bond they have hiding on their rotten balance sheets. This neatly makes European banks look healthier than they really are. All the rubbish is now on the ECB balance sheet.
How have the banks responded to the LTRO? They LOVE it. During the first round of LTRO, the ECB issued loans totaling €489.2 billion In late February, the ECB introduced LTRO2. They pumped out a further €529.5 billion in low-interest loans, with an astounding 800 banks wanting a piece of the action. Yes, that is over a trillion euros worth of loans.
FT Alphaville printed two charts (see below), which they pinched from UBS, that illustrated the the extent of support offered to banks by the ECB. There are some banks that now ECB loans equal to over 10 percent of their funded assets.
As bailouts go, this one is one of the biggest in human history. Yet, how many Europeans actually understand what has happened? Not many, I fear.