If you listen to the talking heads, there is no end in sight to the Euro crisis
Even with the European Central Bank's (ECB) recent Long Term Refinancing Operation
(LTRO), Greece is still making all the headlines.
As of late last week, a possible new deal has been made in Greece. However, the finance ministers that are responsible for the deal are not sure it will be enough to release the second bailout of Greece.
The ECB has been demanding that debt it bought at a discount be honored at full par value. It is now reported that the ECB will sell these debts at cost, and allow the debt to be retired.
This is a huge first step in the process of getting Greek debt levels low enough to be sustainable.
Yet, we are still well into the second year of this crisis and the market is growing tired of endless European emergency meetings.
It reminds me of the period around January 2009.
The reality is Europe needs to go through a hard, brutal adjustment period, where the weak states that cannot handle being in the European Union (EU) leave.
While a New Greek deal has been announced, few people believe it will be the last deal, or the best deal. That is, if it is even ratified in the end.
"It's up to the Greek government to provide concrete actions through legislation and other actions to convince its European partners that a second program can be made to work," EU Economic and Monetary Affairs Commissioner Olli Rehn said.
The rolling bailout process appears to be set up to happen this spring, as the ECB pumps fresh liquidity into its banks for unlimited dollar amounts. The drain on the balance sheets of Euro banks appears to be ending.
The ironic angle few people are tracking is that U.S. banks have been helping to drive Europe's big banks into this crisis.
Setting the Stage for the Second LTRO
Let me explain.
U.S. banks have loaned money to European banks via our money market accounts for periods between seven and 270 days on average.
So when you left cash in your money market account, a significant portion of that cash was actually being invested in unsecured loans to European banks in a search for higher yield.
These funds were typically rolled over at the current market rates, allowing Euro banks access to shorter-term liquidity. However, that began to change in July 2011 when U.S. banks started shortening the terms of the funds or flat out began to repatriate them.
This shift by American banks caused European banks to lose access to what they were using for near-term liquidity. European banks were using short-term loans to make longer-term loans to their clients.
The process of paying back their short-term funding, while still holding onto longer term loans has stretched their balance sheets even more.
This reversal of funding caused an expansion of the leverage at the banks, as they have loans outstanding but have to pay back the source of them.
As result of this liquidity crunch, the ECB rolled out a program to allow banks to recapitalize themselves.
It's called the LTRO (Long-Term Refinancing Operation). (To continue reading, please click here...)