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ECB Becomes Last Resort in Europe, Tzitzouris Says: Tom Keene

December 20, 2011

Dec. 20 (Bloomberg) -- The European Central bank is becoming the lender and borrower of last resort for the European banking system and will be forced to expand debt purchases to combat deflation, according to Tom Tzitzouris of Strategas Research Partners.

“Banks would rather lend to the ECB than lend to each other, and would rather borrow from the ECB at a higher rate and then lend it right back to the ECB,” Tzitzouris, vice president and head of the fixed-income department at Strategas in New York, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

“This is a flight to quality in its most perverse sense and the consequences of it in itself are probably destabilizing,” he said. “I can’t really imagine this is going to last long-term.”

The ECB began its new longer-term refinancing operation today, offering unlimited three-year loans to the region’s banks in an effort to boost demand for higher-yielding assets. Results will be announced tomorrow. The ECB introduced the program on Dec. 8, loosening collateral rules for loans along with cutting its benchmark rate.

Italian two-year note yields fell for a fourth day, touching a seven-week low, on speculation banks bought the nation’s debt to use as collateral at the ECB’s long-term refinancing operation. Spain sold more than its maximum target of bills today as borrowing costs fell. Greece issued 1 billion euros ($1.3 billion) of 91-day securities.

Risks Remain

ECB President Mario Draghi said yesterday that substantial risks to the economy remain and the law forbids him from increasing government-bond purchases to fight the crisis.

“The ECB at this stage isn’t going to say ‘we’re going to engage in some type of quantitative easing,’” or purchases of debt securities with the aim of keeping long-term rates low, Tzitzouris said. “What they are doing is doing everything they can to encourage banks to go out there and begin to expand credit, and it’s not working particularly well.”

The ECB will have to commit to quantitative easing “or something similar,” Tzitzouris said, due to the deflationary risks in the economy triggered in part by fiscal austerity.

German business confidence unexpectedly rose for a second month. The gauge of business confidence, based on a survey of 7,000 executives, rose to 107.2 from 106.6 in November, the Munich-based Ifo institute said today. The median economist forecast called for a drop to 106.

Stress in Europe’s financial system, coupled with slower growth, prompted Standard & Poor’s on Dec. 5 to say Germany and France may be stripped of their AAA credit ratings as it put 15 euro nations on review for possible downgrade. Fitch Ratings lowered its outlook on France to “negative” on Dec. 16 and put Spain and Italy on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis.

European Recession

Economists at Barclays Plc said a European recession has already begun. The euro area’s gross domestic product will contract 1.4 percent this quarter, 0.6 percent in the first three months of 2012 and stagnate in the second quarter before resuming growing in the third, Barclays said in a Dec. 8 report.

“The goal of recapitalization is completely counter to the goal of levering up and arbitraging a steep yield curve, a carry curve, in European sovereigns,” which some banks may now be doing, said Tzitzouris. “The ECB is almost in original territory because you’ve never really had a situation where the Federal Reserve is encouraging banks to put on a long term carry trade on very highly credit sensitive instruments.”

--With assistance from Emma Charlton in London. Editors: Kenneth Pringle, Bob Brennan

To contact the reporters on this story: Liz Capo McCormick in New York at; Tom Keene in New York at

To contact the editor responsible for this story: Dave Liedtka at

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