July 6, 2012
The last time Mario Draghi made an unequivocal statement regarding his actions under exceptional circumstances, we pointed out the unthruthiness of his comment  that LTRO borrowing in no way stigmatized a bank. That did not end so well for the LTRO banks. Today’s ECB press conference perhaps sets him up for another banana-skin down the road. From the 20 minute segment, the ECB head describes the lowering of eligibility standards for ECB collateral to include assets that banks take as collateral in the real economy (“credit claims and ABS of lower rating”, i.e. rusty old cars, empty coffee-shops, unkempt holiday homes). His description of the hypothecated-hell: “It’s very useful [for the banks] to lend to the real economy; as the banks generate collateral that they can now use for funding themselves” – which sounds awfully like a ponzi scheme – is nothing less than a massive on-boarding of all European asset risk by the ECB (using the banks as a simple pass-thru). This would seem to dramatically lower the quality of the ECB balance sheet. But have no fear, for as the new maestro puts it “we want to do this in a way to keep the risks of the ECB balance sheet very very low”. Low indeed.
His commentary on the lending to SMEs and the broadening of ECB collateral eligibility starts at around 20:00…
All this comes down to is simply enabling ‘some’ credit to flow to the banks to cover funding holes from deposit flight (and ECB margin calls ) and perhaps confirms our view that a Senior-Sub decompression trade  remains worthwhile as more and more of European bank balance sheets become encumbered. Also worthy of mention is this is an implicitly inflationary action so perhaps could help gold in its leaking effect into the real economy – though we suspect this is less so.
Monitoring the levels of this line item of collateral in the ECB balance sheet is critical.