Quantitative Easing (QE) is/was seemingly a magic remedy, at least in the short-term. As GLG's Pierre Lagrange notes, central bankers can conjure up money out of thin air and use it to purchase assets - transforming transferring toxic debt, stimulating demand for risk assets, devaluing currencies (this deflating debt), and maintaining low interest rates on govvies. The ECB's more restrictive mandate, however, does not allow them to print money for any other purpose than lending and so direct QE was out of the question and so, as the chart below demonstrates, they ingeniously created the LTRO - delivering an infusion of liquidity (potential profits from carry and hope for capital raises).
Of course we now know that the encumbrance issues and banks' lackadaisical attitude to raising capital has left many on a worse situation (far worse than if 'traditional' QE was employed) as financials and sovereigns are even more contagiously integrated, collateral has been whisked away from a desperate market, and the short-term benefits never flowed to the real economy (gummed up in the lack of transmission from bank reserves). Theoretically, there are few limits to what the ECB can do, and it seems the market is once again testing the politicians' and central bankers' resolves as we head into a summer dominated by distractions like the Olympics - increasing the chance of risk flares on low liquidity.
The key then is that LTRO may look a lot like QE - and is the ECB's workaround their mandate, but the unintended consequences will only make matters worse as the vicious circles re-appear...
And of course this: