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Boeckh Investment Letter

Investment and economic commentary by J.Anthony Boeckh and Robert Boeckh

The ECB and the Eurozone Crisis: Stepping Up to the Plate

The old saying “Watch what they do, not what they say”, has never been more true than with recent ECB (European Central Bank) actions. As we have said for some time, the main central banks of the world are the only game in town now that the sovereign debt crises—actual or potential—have taken governments out of the play. This is particularly true in Europe where the crisis of confidence is most acute and a persistent run on European government and bank paper has left a huge question mark over the roughly €2.0 trillion that governments need to raise and refinance in 2012 and further euro bank needs of €1 trillion in maturing debt rollovers and new capital.

In the face of European political dysfunction and gridlock, the ECB has once again brought the crisis off the boil. Following the announcement in December of the ECB’s three year loans at 1%, banks rapidly took up some €500 billion of cheap funding, much of which appears to be used in arbitraging the higher level of yields on Italy, Spain and other country bonds.
The result is that the ECB balance sheet has expanded dramatically, which means that its assets (loans to banks shown in Charts 1 and 2) and liabilities (cash into the system) have jumped sharply.

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