Credit System Subverted - Implosion Imminent With Trillion Euro Gamble

On Wednesday, the second long-term refinancing operation (LTRO), sponsored by Mario Draghi's European Central Bank, lent out a staggering €529 billion to faltering banks, which could put up almost any collateral to get these short term life rafts. Nearly 800 commercial banks took advantage of the ECB's half trillion euro currency blast—taking the grand total of the European Central Bank's LTRO program to over a trillion euros.

Ambrose Evans-Pritchard of the Telegraph quotes a few congratulatory bakers and academics, who make it seem as if Draghi's central bank just saved the credit system and the entire universe:

Mr Draghi has won high praise from monetarists around the world, convinced that he has acted just in time to head off a dangerous contraction of the money supply and a full-blown banking disaster. "Draghi has been very astute, and has given the single currency project another lease of life," said Professor Tim Congdon from International Monetary Research.

"It helps enormously that banks have time to recover. Cheap loans will boost M3 money growth and drive a wider economic recovery this year.

And guess what those banks did with that currency? They went right ahead and bought more sovereign bonds from Spain and Italy—amongst the weakest sovereign bonds you can buy. The weakest banks used the funding to buy the weakest government bonds.

Bob Janjuah from Nomura said the whole credit system is being subverted. "We have monetary anarchy running riot where the elastic band between the real economy and the current liquidity-fuelled markets is stretched further and further beyond credulity," he said.

Professor Charles Wyplosz from Geneva University said the ECB ploy of bailing out insolvent states by the back door will come back to haunt if Europe’s leaders fail to sort out EMU’s fundamental woes and later face a "contagious wave" of sovereign defaults.

"The LTROs make things massively more dangerous. The banks borrow cash from the ECB to acquire sovereign bonds. The more the banks accumulate these bonds, the riskier the situation is becoming. The ECB seems to be making a trillion euro bet," he said.

Does any of this really matter? Are Draghi and the ECB actually strengthening anything or is he actually weakening the system he is trying to protect by weakening the balance sheet of his collective banking system? In reality this is simply window dressing to what's really going on Europe.

The Financial Times quotes Peter Sands, CEO of Standard Chartered Bank:

But Peter Sands, chief executive of Standard Chartered, said that the glut of central bank money risked “laying the seeds for the next crisis”. Mr Sands, whose Asia-focused bank is insulated from the eurozone crisis, said that no thought had been given to long-term consequences. “It is not clear what the exit strategy is. What happens in three years’ time when it needs to be refinanced?”