Long-term Refinancing Operations (LTRO) became a standard non-standard monetary policy tool in the European Central Bank’s (ECB) toolkit late in 2011. A second confounding (global) banking crisis had struck yet again catching global policymakers with their pants down, this one seemingly centered directly upon Europe.

On December 8, 2011, amidst constant rumors (probably real) that two of the major European banks had reached the brink of disaster, European officials announced the creation of these LTRO’s. But, to get them going along, central bankers realized they had to make perhaps the more important if related changes to standard ECB operations:

To increase collateral availability by (i) reducing the rating threshold for certain asset-backed securities (ABS) and (ii) allowing national central banks (NCBs), as a temporary solution, to accept as collateral additional performing credit claims (i.e. bank loans) that satisfy specific eligibility criteria.

Not implied in the name, LTRO’s are indeed collateralized as are every one of the various refinancing programs; these are not unsecured transactions if only to feign deference to Bagehot. In this way, the ECB by reducing collateral thresholds attempted to provide funding the euro repo market disastrously would not. In late 2011, that market hadn’t much desire to accept Club Med sovereign bonds, especially the seemingly infinite mass issued by Italy.

What is implied by the name is their maturity, or tenor. These are long-term financing arrangements, typically just a shade over three years (1099 days) in length. Since collateral pledged to the NCB’s in order to participate in the ECB’s LTRO’s is locked away, no longer reusable, giving up any considerable amount comes with unappreciated collateral costs.

If, of course, the collateral being put up to the NCB is ridiculous junk, so much the better. For better quality collateral posted, maybe there’s going to be a time when the banks would rather have it back – if function in the dynamic private market comes back.

Fortunately, or not, the ECB in its initial 2011 specs provided a close-out provision which gave banks the opportunity to repay some or all of their outstanding loans after just one year.

The first two LTRO’s, one late in 2011 with the second following closely in February 2012, together tallying up to – at the time – a monumental near-€1 trillion in “liquidity.” One year later, early 2013, European bank participants clawed roughly €140 billion back.

Commentary was divided on what this level of repayments might have meant. Were these supremely confident banks no longer requiring such massive assistance? Should the world have been disappointed more, a lot more, wasn’t taken back? Where did the collateral provisions and the insinuated condition fit into all this?

None of those questions were adequately answered because, 2013, happy days were then again – at least that’s what everyone said. It did not, of course, actually work out that way. Those long ago LTRO’s were quickly and so easily forgotten, replaced in 2014 by T-LTRO’s before eventually Europe’s QE(s) in 2015.

The LTRO’s have made their reappearance in Europe again beginning in March 2020 – when else? The first operation was a relatively modest €115.0 billion bid on by just 114 bank counterparties. The term was the typical 1099 days, the charge for the funding a zero basis point spread to the MRO (set at zero).

For March 2020, that was kind of a dud. Global Financial Crisis 2, embroiling Europe as much as everywhere else, and in euros with another 2011-style rescue on offer just 114 bidders showed up for a rather paltry €115 billion.

Perhaps coincidentally, though probably not, on April 22, not even a full month later, the ECB changed its collateral eligibility requirements once again to include even more junk-y junk backing its various refinancing operations; including LTRO’s and their longer maturities.

The next one was set for June 24 and – just coincidence? – huge difference: even though GFC2 by then was supposedly several months behind the world, suddenly there were 742 bidders taking up €1.31 trillion. Same terms as before, 1099 days at zero spread above the same MRO.

Over the interim, the ECB has offered three additional LTRO’s, the middle two of which (September and December) were relatively small and thus reflation-arily encouraging (along the lines of how banks didn’t seem to want a lot more in long-term central bank funding). Then the third, conducted on March 24, 2021, suddenly big demand again.


Everything was awesome in 2021, allegedly, and by March with global reflation in full game there was every (mainstream) sunshine and rainbow given for the world to believe full recovery if not too much of one (inflation). Yet, here was a surprising 425 bidders demanding an unhealthy €330.5 billion more on top of the €1.5 trillion in three-year financing the ECB had already delivered at the prior four operations. And I haven’t even added QE’s here (you can see their additions on the chart above).

Collateral in euro repo still that messed up?

Obviously, we cannot directly answer such a question because, even though the Europeans are leading the investigation into what they’ve called Secured Financing Transactions (SFT), of which repo is the big part, their snail’s pace has meant for over half a decade officials have stated they recognize just how much of a systemic issue collateral can be, yet have done so very little about it. Barely even gathering minimal information.

But we know all about the LTRO’s and what’s on the ECB’s balance sheet. If you weren’t keeping track of them, I did it for you: since March 25 last year, there’d been an obscene €1.863 trillion in “money printing” and “liquidity”, with the last serious dose arriving not quite two months ago. An amount large enough that it actually sticks right out on the chart above.

Surely inflation in Europe is out of control, worse than it is in the US?

According to Eurostat’s final calculations for April 2021, the Harmonized Index of Consumer Prices (HICP) rose 1.6% year-over-year. While that’s up from 1.3% in March, and it counts serious base effects by being made in comparison to the index in April 2020, not even 2% with a huge energy/oil headwind likewise contributing.

Whatever must be hidden negative factors are displayed perfectly by the so-called core inflation rate which for April – the very month following the huge €330.5 billion latest “money injection into the economy” – tumbled to just 0.7%. Not only was that down for the third consecutive month, this was among the lowest in European history (again!)

The smallest silver lining here is that the ECB is contributing an ever-greater empirical work to the already staggering volume of evidence conclusive demonstrating that QE, or LTRO’s, just plain “money printing” conducted through the “logic” of bank reserves cannot be any of those things. It sure isn’t inflationary.

The contrast, therefore, between European inflation experience and the American economy’s sort of control group thus identifies other factors – from renewed/ongoing lockdowns in Europe, to Uncle Sam’s direct injections of cash to US persons. The one thing inflation has not reacted to is monetary policies in either place.

Inflation, meaning a broad and sustained advance in consumer prices, is always and forever a monetary phenomenon (as none other than Copernicus had unequivocally stated more than four hundred years ago). What bank reserves are to the modern economy and its finance system, little more than one substitute form of asset/liability tradeoff. The actual and effective money in this system is a much more complicated affair.

Only starting with collateral. Again, why were European banks, with collateral eligibility still supremely relaxed, so eager not even two months ago to give up whatever they posted to the NCB’s for three years so that they could participate in the ECB’s last LTRO to that degree?

They can’t even manage transitory “inflation” in Europe for “some” reason. Given that European banks remain core participants in the global money scheme, and that inflation therefore continues to be connected directly to a (hidden) set of global money factors, this isn’t just about European LTRO’s and Europe’s unique HICP.