Long-term refinancing operations (LTRO)

The Long-term refinancing operations (LTRO) of the European Central Bank (ECB) are designed to provide stability to Europe’s banking sector and keep sovereign bond yields down to sustainable levels (below 6% in the case of Spain). The mechanism is the ECB supplying funds to the banks at 1% for up to three years.

The banks in turn have to post collateral to secure these funds. The lower the quality of this collateral, the bigger the ‘haircut’ – ie, the lower the amount that can be borrowed. These funds can find their way into sovereign bonds, which carry a higher yield than 1%, allowing the bank to make a profit on the exercise. This buying should also push up prices and force down yields.

Another possibility is the banks hoard the money by putting it back on deposit at the ECB (at a lower rate). It can then be use to repay private funding at a later date. The least likely option is the money is lent out to firms and individuals, most of whom are currently debt-averse.

Watch Tim Bennett’s video tutorial: What is the LTRO?

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


19 December 1932: BBC World Service begins

The first royal Christmas message by George V gave the fledgling World Service an early boost six days after it was founded in 1932.