The advance of the long-term refinancing operation (LTRO) might have saved the eurozone from collapse but the ECB has opened itself up to serious potential risks in its determination to deliver lending, according to F&C.
The European Central Bank’s (ECB’s) balance sheet is expected to grow to about €1.3 trillion (£1.08 trillion) following the second auction, says Ted Scott, director for global strategy at F&C. Accelerated lending on this scale has inevitably lead to a decline in the quality of assets held on its balance sheets,” he adds.
Scott says: “The quality of the assets held by the ECB on its balance sheet has unequivocally deteriorated… for instance, the collateral the ECB holds includes large amounts of Greek bonds as well as other periphery debt.”
Should Greece default, “the ECB will be left holding billions of euros of worthless assets”, says Scott, which would quickly impact on other vulnerable government debt and the credibility of the bank as a whole.
However, the global strategist finds the second stage of the LTRO a “necessary gamble”, which the ECB should be congratulated for.
It is how banks, sovereign states and policy makers respond to the initiative which will determine the risks, he explains.