Tuesday, January 29, 2013
Did anyone say shrinking?
One of the latest "hot stories" is the so-called currency war. The theory goes that central banks try to weaken their currencies by excessive liquidity. This week's earlier repayments of the first 3yr LTRO has given rise to fears that a shrinking ECB balance sheet would contribute to a stronger euro. However, there is some solace for the supporters of the shrinking theory: the ECB's balance sheet is still much higher than eg the Fed's. It would require the repayment of almost the entire take-up of the two 3 yr LTROs to immediately bring the ECB's balance sheet to US levels.