LTRO allows the highly levered banks to move onto super leverage. It is profitable until the bonds they buy drop in value. Politicians seeing interest rates drop because of temporary increased demand for sovereign bonds will be less willing to balance their budgets eroding confidence confidence of the bondholders. The increased ECB balance sheet will continue to climb from above 25% GDP increasing fears of future inflation from the money printing and reducing the perceived likelihood that the ECB will be capable of future bailouts eroding bondholder confidence further.
Eventually the confidence tips over into the waterfall event probably triggered by a default. My guess is Hungary. Sovereign defaults occur in waves so the interest rate every sovereign pays will spike. The super leverage means even small bond losses will render weakened banks crippled and render the ECB insolvent.
When I worked on a macroeconomic model looking at Europe, when every economy slowed at the same time due to an increase in the oil price there was an extra hit to growth of -2% as the slowing exports caused slowing imports in a vicious circle. Aren't we facing that oil price spike today? Further, the desperate governments are relying on tax increases as much as spending cuts where the negative multiplier is likely 2.5 to 3 so we already have a huge drag on growth. The only hope is to copy President Harding and shrink the government sector, reduce taxes, allow bankruptcies, let the private sector grow and restore confidence. This will not happen with ESM which like the ESF in the US will likely trigger a massive expansion of the state.
