Markets are watching the ECB’s upcoming 3-year Long-Term Refinancing Operation [read: money printing programme] tomorrow. Back in December, the ECB implemented a huge back-door QE programme by putting in place structures so the banks could firstly offload their bad loans (assets) with the ECB in return for cheap 3-year loans, then use the proceeds from the cheap loans at low interest rates of 1%, and loan this money on to European governments, earning an interest rate spread of 5-6%.

Most bankers are taking full advantage of this easy money offer. Italy yesterday again borrowed short-term in the form of T-Bills and the government’s borrowing costs continued to decline, below 2% now from levels of 6% just months ago. The situation wasn’t magically resolved, it is owed to skewed incentives, manipulation by the ECB, to encourage banks to drive these borrowing costs lower.

The ECB pumped up base money by a net €200 billion in December, which has turned things around for periphery governments such as Italy.

Economists expect European banks to take up about €500 billion tomorrow. I wouldn’t be surprised to see an even bigger uptake. Either way, expect to see markets respond very strongly if more base money is injected and on the expectation that price inflation is set to accelerate and an economic turnaround is just around the corner for the Eurozone.

European stagflation looks very likely in coming months and quarters.