Synthetic QE3?

Today, December 4, the markets started to make concious about the huge amount of redemptions of bonds in several countries which must be refinanced in one way or another. The amount needing to be refinanced rises to $8.5 Tn with payment of coupons included.

The search of investor would be complicate considering that the rating agencies have given clear signs of his intention of cutting the rating of at least 15 members of the Eurozone, with the rising cost of rollover the debt that this means.

U.S. has no problem getting buyers of the debt that is maturing and we will see it later. The case for Japan is a little different because they have a rollover issue of $ 3,000 bn in 2012. In Japan their Pensions funds have been more prone to sell rather than buying Japanese bonds by demographic themes so maybe they won´t be there to help.

Italy announced that he has refinanced half their needs of 2012 taking advantage of the LTRO program sponsored by  ECB. Considering just the other half that Italy needs and the debt maturing in France and Spain the amount at risk is $800 bn needing to be refinanced, amount more managable. 

Now, lets consider the U.S. case. If we remember, last november 29 the Federal Reserve reinstated the swap arrangement program between central banks to mitigate the growing funding pressures coming from the European system. Emphasys added.

These swap facilities respond to the re-emergence of strains in short term funding markets. They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions and for the Federal Reserve to deliver foreign currency to U.S. institutions if conditions warrant. At present, there is no need for the Federal Reserve to offer liquidity in foreign currencies

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Agreements governing U.S. dollar swap arrangements with the Bank of Canada, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank were announced ....On November 30, 2011, these central banks also agreed to establish temporary bilateral swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies. These swap lines are authorized through February 1, 2013.

On December 30 the Fed also lowered the rate on 50 bp of these swaps arrangements. Also the ECB on December 22, as we have mentioned on several occasions, loaned to banks €500 bn as part of the LTRO program.

Reviewing the operations conducted under the LTRO program shows that, there is a match between what is delivering to tight deadlines and what is getting from the Fed, in other words, some of the money the ECB is putting under this program very could well be from the Fed. Are two cases so far but we could speculate that the program of the swap arrangements between central banks could continue for another three years until the end of LTRO loans.

Imagine the mechanics. ECB asked dollars to Fed at 0.5%, by the LTRO program provides this money to european banks at 1% as a loan that matures in three years. The bank then could cover this loan by buying Treasuries. Remember, the cost along the U.S. curve is more or less 2.7%. That means the bank could take a carry of 1.7%. 

Banks earn this carry and the Fed doesn´t need to deliver another round of QE because the Eurpoean banks will be there to bid and keep the curve flat, all this, just for lend to the ECB.