The big payback: making money from LTRO exits

If pressures did not subside, ‘it would be open to the ECB to react by cutting its official interest rates’, according to Monument Securities analyst Stephen Lewis.

‘There would then merely be a change in the spread between official and market rates, with market rates gravitating back to levels at which they stood prior to the LTRO repayment.

‘Since the ECB aims to maintain accommodative monetary conditions, it may well be expected to take such action on its own lending rates, if the need arises.’

More broadly, the emphasis on bank access to markets illustrates what some – in particular the ECB – are calling a bottoming in the credit cycle. While the transmission to the real economy remains tentative to non-existent, the onward chain is no longer being blocked by weak bank balance sheets.

Matthew Barnes, manager of the ACPI Global Credit fund , points out that the rising tide of huge investor appetite for high yield debt had, on mark-to-market terms, has repaired much of the damage.

RBS, for instance, reported at the end of the year that it had been able to reduce its ‘non-core’ book of potentially dubious credit assets from £258 billion in 2008 to £65 billion at the end of Q3 2012.

‘It has allowed them to recover on mark-to-market terms far better than they ever could have envisioned,’ said Barnes. ‘Banks have had so much opportunity to be made whole.’

He added that the recent falls in the most competitive consumer saving rates to fresh historic lows illustrate their increased flexibility in the cost of capital.

While not a screaming buy, subordinated lower-tier long-maturity financial debt remain at fair value, said Barnes, versus an otherwise overpriced market.