The EU shell game

The FT may have just run the misleading headline of the week: "Demand for ECB loans rises to €489bn"

Who are the borrowers? European banks! What are the terms? A subsidized interest rate for 3 year funding and broader criteria for acceptable collateral to pledge against these loans.  Hmm... collateral... like other EU sovereign debt? Yup.

So let's get this straight, the ECB is lending to Eurozone banks who will use Eurozone sovereign debt - debt of the very sovereigns who are over-levered and can't afford to re-capitalize these very banks - to collateralize these loans.  

Photo: European Parliament

Everybody calm down, part of my training was alchemy

Greek, Spanish, and Italian debt yields all rose after the announcement.