Archive - Oct 24, 2011

This morning, the ECB announced that use of deposit facility as of Friday hit €202 billion (while use of the marginal lending facility jumped to €4.6 billion, confirming that in addition to the USD shortage expressed by the 50-something^th sequential increase in USD Libor from 0.418% to 0.42%, European banks now have a EUR shortage as well, and hence the FX repatriation and EURUSD levitation). As the chart below reminds, the ECB deposit facility usage is already past the second highest MRO cycle peak, having now surpassed the August peak high of €198 billion. But it's worse than that, because while the events of September lead to the first week of October when the whole world appeared set to implode until the FT rumor (since mocked repeatedly) of a European bail out hit on October 4th leading to a relentless market melt up, in the current post reset cycle, things are coming to a head much faster. To wit, the number of days it has taken since the deposit facility usage reset post MRO, since the beginning of the cycle, is now a mere 11 days: this is how long it took to go from €62 billion to €202 billion. In the previous, September, cycle, it took double that, or 20 days, to get from €76 billion to €210 billion. It seems that for all talk of European improvement, the key angle of the European "triangle of terror" - Bank Funding Stress, is now the worst it has been in all of 2011 and the worst since the first, and very much unexpected, Greek bailout in May 2010.

While the market continues to look forward to the latest Eurosummit on Wednesday (which rumor is may be postponed once again) with mouth-gaping expectations, the truth is that Europe "may have already entered a recession" as Goldman predicted some weeks ago, a prediction which was confirmed by today's miserable manufacturing and services PMI numbers. From Goldman: "The Euro-zone flash composite PMI came in at 47.2 in October, down from 49.1 in September. The October reading is below consensus expectations, which pointed to a somewhat more modest drop to 48.8. The decline was registered in both manufacturing and services, though it was slightly more pronounced in the latter (Manufacturing: down from 48.5 to 47.3, Services: down from 48.8 to 47.2). The pace of the decline in the headline output component of the Composite PMI accelerated in October. With its sixth consecutive monthly decline, the composite PMI has reached its lowest reading since July 2009." This is bad, and it gets worse. As Reuters concludes: "The euro zone's debt crisis might already have pushed the bloc's economy back into recession, according to business surveys that showed China's economy taking a stride forward in October." So why is this an issue? Simple - as a reminder in a little noticed statement last week, S&P said it "would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession." Well there's you recession confirmation. So: where is the European bailout killing downgrade of France?