5 reasons why investors need not be excited about LTRO-2

Santosh Nair
moneycontrol.com

Equity investors are cheering the second round of Long Term Refinancing Operations (LTRO-2) in Europe, in the hope that it will trigger a similar rally in shares the way LTRO-1 did. Earlier this week, banks in Europe borrowed 529 billion euros for three years at 1% from the European Central Bank under the LTRO facility. But this time, the liquidity injection in the banking system is unlikely to fire up equity markets, argues Nischal Maheshwari and team of Edelweiss Securities.

Here are five reasons why Edelweiss thinks the stock market should be circumspect about the much hyped LTRO-2.

* LTRO-1 carried a surprise element and successfully altered the EU    banking sector outlook ] from very bleak in early December to    somewhat benign. In contrast, markets had already rallied in    anticipation of LTRO-2, and so much of the upsides were already    priced in.

* Even in the case of quantitative easing (QE) in the US in the aftermath of the financial crisis, QE-1 was a huge success, but gains from QE-2 were only marginal.

* LTRO-2 would surely improve the EU banking sector outlook, but may not bring about a sea change, something which the LTRO-1 did.

* LTROs are happening when governments, banks and households are trying to reduce borrowing, spending. In contrast, QE-1 was set into motion when governments across the world were announcing stimulus packages to revive their economies.

* So far LTROs have not translated into loan growth for banks, suggesting that monetary transmission in Europe is not working. Partly, banks are very cautious in lending as they have to cut lending    in order to meet capital requirements. Pumping in more primary liquidity, therefore, may not ensure any improvement in monetary transmission.

Also Read:Does the Indian economy need QE/LTRO support?