Friday, December 23, 2011

Is LTRO QE in disguise?

Here's Draghi's explanation from an FT interview:
Is this Europe's version of “quantitative easing”?
Each jurisdiction has not only its own rules, but also its own vocabulary. We call them non-standard measures. They are certainly unprecedented. But the reliance on the banking channel falls squarely in our mandate, which is geared towards price stability in the medium term and bound by the prohibition of monetary financing [central bank funding of governments].
Coming back to what banks are going to do with this money: we don't know exactly. The important thing was to relax the funding pressures. Banks will decide in total independence what they want to do, depending on what is the best risk / return combination for their businesses. One of the things that they may do is to buy sovereign bonds. But it is just one. And it is obviously not at all an equivalent to the ECB stepping-up bond buying.
Sounds like a yes and a no.  What's interesting is the statement about the prohibition of central bank funding of governments.  Seems like Draghi is trying to say that legally he can't just outright start buying sovereigns, but he's doing the closest thing he can--financing the banks and then hoping that they turn around and buy more sovereigns.

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