Large profits are being made by European banks through the “carry trade” as a result of borrowing at 1% via LTRO. They are able to buy sovereign bonds at 6%, taking a profit about 5%. The ECB is practically giving away €1 trillion in free cash to enable the banks to rebuild their balance sheets. Of course to enable banks to avail of this facility, they must offer  trash collateral in return. The quality of this collateral is highly debatable and indeed the ECB will worry about this at a later date.

The other main advantage of the “carry trade” is that sovereign bonds are rolled over which enables the can to be kicked further down the road. The losers in all of this are inevitably the european taxpayer that must first subsidize the profits by paying the difference between the bond price and the price borrowed from the ECB. Ultimately by enabling the bonds to be rolled over in this artificial fashion we are only storing up a much larger debt mountain, which eventually will overwhelm the weaker nations abilities to grow and pay off this debt.

Carry trade is a neat idea in the short-term and serves its purpose, but over the long-term will only make things worse.

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