Since the ECB released its MFI balance sheet data and monetary developments statistics, it’s very interesting to take a look at the level of (government) bond buying from Italian and Spanish banks in the era of 3Y-LTROs:

Net Change in ownership

Italy

Spain

S + I

Euro area loans to General Government

Oct-2011

-2,7

-1,4

-4,1

Nov-2011

-7

-0,3

-7,3

Dec-2011

4,2

27,3

31,5

45

Jan-2012

28,4

24,2

52,6

40

Feb-2012

21,6

16,4

38

36

Total Dec – Feb

54,2

67,9

122,1

121

* I am using credit to government in the form of securities for ‘Euro area loans to General Government’

The move away from government bonds during Oct/Nov is quite visible as is the large reversal after the first 3Y-LTRO (in the case of Spain it seems the reversal might have happened even before the LTRO) on Dec 22. According to the ECB, government debt in the form of securities in 2011Q3 was EU585,2bn for Spain and EU1590bn for Italy. As a result, the total net change for Dec – Feb is equal to 3.4% of government debt for Italy and 11.6% for Spain. The net change for Spain is very impressive.

Compared to total Euro area government debt net issuance, the net change for Italy + Spain is very large, especially for January, signifying a clear increase in holdings (net of new issuance). In total, Italian and Spanish banks acquired as much bonds as there was new debt issuance in the whole euro area for the Dec – Feb period.

Overall, it seems that in terms of lowering pressure in sovereign debt markets of Spain and Italy (which are the main European risks along with Belgium), the LTROs were a success. The open question (especially given the latest increase in bond yields for both countries) is wether this effect will be long lasting, especially since fundamentals have not changed significantly, with both countries in deep recession and with Spain facing large central and regional government deficits, huge unemployment and a significant NPL ratio with a banking sector under serious stress.