With 2011 rapidly winding down EuroIntelligence discusses the LIBOR-OIS spread, the ECB’s Long Term Refinance Operation (LTRO) and the End of Yet Another Suckers’ Rally
There is a depressing regularity about any apparent good news that comes from Europe these days. The markets cheer for a short period, and then revert to normality once they realise that the underlying problems have once again not been addressed. The good news this time was the higher than forecast take-up of the ECB’s three-year long-term financing operation [LTRO], which came in at €489bn. The markets rallied strongly on those numbers, hoping that the banks would not come to the rescue of sovereigns and start buying up bonds. In reality, what we are seeing is that banks are dumping their most toxic asset-backed securities, including their own bonds, as ECB collateral.
The FT has the story, quoting one analyst as calling the LTRO a “sugar rush” – which about sums up the overall effect of the ECB’s liquidity policies. Also note that the Libor-OIS spread, which measures the stress in inter-banking markets, has not eased up since last week.
The best comment this morning on the impact of this operation came from Mark Schieritz, [Translated From German] who gives a downbeat-realistic assessment. He says the liquidity shower will have a marginally positive impact on the banking sector, in the sense that it reduces the probability of a liquidity squeeze. It probably prevents a massive liquidity crunch, but it is unlikely to lead to more private sector credit. He also dismissed the backdoor theory – that banks would now use the money to buy government bonds. One reason for their caution is that future stress tests might require a corresponding increase of core-tier one capital to back such purchases. Schrieritz concludes that most of the money will end up with the ECB.
LIBOR-OIS Spread Chart courtesy of Bloomberg
The spread and the direction of the spread suggests underlying stress in credit markets. A healthy spread would be about .1. Although elevated, the spread is nowhere near as bad as during the Lehman collapse in 2008.
LTRO “Sugar Rush”
ZeroHedge comments on the ECB’s financing scheme in Here Is The Math: Carry Trade Profits From The LTRO Are Woefully Insufficient To Make Any Impact
Following yesterday’s €489 billion LTRO there are few things we know with certainty, primary among them is that the net proceeds from the 3 year refi operation are really €210 billion, due to the rolling of various other duration facilities which are already in use into the LTRO as discussed yesterday.
What we do not know, is whether the net proceeds of €210 billion have been used by banks to purchase sovereign debt or as Peter Tchir suggested, are actually used in a reflexive ponzi whereby banks use the explicit ECB guarantee to buy their own debt.
Perhaps the best evidence that the LTRO was an epic failure when it comes to subsidizing the peripheral bond market is the fact that hours after its completion the ECB was forced to jump into the secondary market and buy up billions in Italian and Spanish bonds: an action that was supposed to be conducted by the banks themselves.
Italy GDP Contracts in Q3, Heads for Harsh Recession
Reuters reports Italy economy shrinks, heads for harsh recession
Italy’s economy shrank in the third quarter, setting the country on course for what is expected to be a prolonged recession hampered by a debt burden demanding harsh austerity.
Gross domestic product in the euro zone’s third-largest economy sank 0.2 percent from the previous three months, hit by a fall in domestic demand. It was up just 0.2 percent year-on-year, national statistics bureau ISTAT reported on Wednesday.
The data was weaker than expected and points to an economy deeply troubled even before tough austerity measures were adopted in recent months to try to cap soaring borrowing costs.
“A flurry of poor economic data and the intense financial contagion hitting Italy from the euro zone debt crisis point to a painful and prolonged recession which is expected to prevail until the final quarter of 2012,” said IHS Global Insight’s Raj Badiani, who forecast a 1.5 percent GDP contraction in 2012.
This will make new, technocrat Prime Minister Mario Monti’s task even harder.
Earlier this month, he presented 34 billion euros of tax hikes and spending cuts, saying Italy’s third austerity package since the summer was needed because of a deteriorating growth outlook.
Bizarro World Math
Check out that last paragraph closely. Only on Bizarro World would one need tax hikes and austerity packages “because of a deteriorating growth outlook“.
Sarkozy Promises to Not be Sarkozy
Also straight from Bizarro World please consider this snip from EuroIntelligence
Sarkozy announces there will be a “break” between president and candidate Sarkozy
Speaking to about 100 deputies from his own UMP, Nicolas Sarkozy announced there will be “break” between what he stands for as the current President and what the candidate Sarkozy will stand for, according to Les Echos [In French].
Without going into detail he raised expectations for the job summit he intends to hold on January 18, which may be inspired by his talks with Chancellor Gerhard Schröder past Tuesday when the former German explained how he introduced the far reaching social and labour law reforms with his „Agenda 2010“ in the early 2000s. Sarkozy was upbeat regarding his chances to win the presidential elections in May 2010. The president compared his Socialist challenger Francois Hollande to former presidential hopefuls such as Edouard Balladur or Lionel Jospin who were leading the polls in December but who lost in the elections in spring.
The candidate Sarkozy is in essence running against the track record of the current French president Sarkozy. Incredible.
Mike “Mish” Shedlock
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