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European Interbank Lending Conditions Deteriorate Fast Post Latest Liquidity Withdrawing LTRO Roll

Tyler Durden's picture


A week ago we asked whether "Europe was getting ahead of itself as excess cash in the euro banking system drops to post-Lehman low" following the most recent LTRO roll. In it roughly €225 billion in 3,6 and 12 month liquidity providing ECB credit
facilities to Eurozone banks expired and were rolled into a far lower
amount of replacement maturities: only 64% of the full amount was
retendered, meaning about €80 billion in system liquidity was drained. As we then assumed this action was nothing than a myopic attempt to put some lipstick on the slaughtered European banking pig, which in exchange for demonstrating that it has liquidity matters under control was willing to cut its excess liquidity buffer to almost zero. Sure enough, the market now seems to agree. As the chart below demonstrates, virtually every unsecured funding metric has exploded since the action, with the rate on Commercial Paper nearly doubling from the pre-LTRO days, while three month Euribor has once again surged to just under 1%. In other words the market is making liquidity provisioning for European banks very costly, and a threshold may soon be passed when it is cheaper to borrow via the Fed's currency swap arrangement than approaching the interbank market, once again confirming that while the ECB is backstopping all the financial activity in Europe, it is the Fed which is on the hook should the ECB fail.

Even JPMorgan looked at this liquidity disruption negatively:

Is this week’s sharp decline in the excess cash sustainable? The availability of unlimited liquidity at the weekly operation combined with this week’s sharp rise in interbank rates, is likely to trigger some speculative borrowing from the ECB over the coming weeks, but this is unlikely to be large. The main lesson from the expiry of the ECB’s long term operations, both this week and last July, is that the withdrawal of long-term ECB funding discourages speculative activity by core banks and this pushes the excess cash in the Euro area banking system to a new lower range, only modestly above zero.

The market has now spoken and is again forcing European banks to drop the farce, and go back to suckling at JC Trichet's teat as they are so experienced at doing.


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Tue, 10/12/2010 - 08:55 | Link to Comment hugolp
hugolp's picture

I wish I could have a business where if things go wrong, instead of going bankrupt I just can get cheap money through devaluation of everyone elses money.

Tue, 10/12/2010 - 09:00 | Link to Comment snowball777
snowball777's picture

Too lazy to deal crack?

Tue, 10/12/2010 - 09:44 | Link to Comment hugolp
hugolp's picture

Selling crack is more respectable than banking as it is now. At least they have to deal with market consequences.

Tue, 10/12/2010 - 09:59 | Link to Comment snowball777
snowball777's picture

Well put.

Tue, 10/12/2010 - 10:03 | Link to Comment taraxias
taraxias's picture


Tue, 10/12/2010 - 08:56 | Link to Comment Perseid.Rocks
Perseid.Rocks's picture

That rushing waterfall sound is starting to get real loud now.

Tue, 10/12/2010 - 08:59 | Link to Comment snowball777
snowball777's picture

Brother can you spare a euro?

I think I'm getting sea-sick from this FX teeter-totter, but a little puke is worth the action.

Tue, 10/12/2010 - 09:00 | Link to Comment idea_hamster
idea_hamster's picture

I'm reminded of those NatGeo tv clips where all the dinosaurs look up with meek curiosity as a blazing meteor descends from the sky.

Tue, 10/12/2010 - 09:00 | Link to Comment wiskeyrunner
wiskeyrunner's picture

So much for the sell off, futures about to go green.

Tue, 10/12/2010 - 09:08 | Link to Comment Iam Rich
Iam Rich's picture

Heh, no kidding.  Seems the 4a EST ramp is alive an well.  What is that all about anyway, every morning like clockwork?

Tue, 10/12/2010 - 09:01 | Link to Comment RobotTrader
RobotTrader's picture

No worries.

Any "convulsion" in Europe will simply:

1)  Cause an immediate panic into U.S. Dollars and U.S. Treasuries

2)  Interest rates will collapse to fresh, new 50-year lows

3)  McMortgage rates plunge below 4%

4)  Interactive Brokers lowers margin interest rate to .02%

5)  "Animal Spirits" are re-ignited

And the "Wash/Rinse/Repeat  Algo/Igor/Robo" sequence starts anew...


Tue, 10/12/2010 - 09:02 | Link to Comment 99er
99er's picture

Music To Match The Market

Tue, 10/12/2010 - 09:04 | Link to Comment jortex
jortex's picture

Goldman has raised its 12-month price target for gold to $1,650 an ounce

from the prior forecast of $1,365 an ounce. Can you say "Gold Top".

Tue, 10/12/2010 - 09:17 | Link to Comment UninterestedObserver
UninterestedObserver's picture

Uh yeah if the Euro becomes toilet paper then OBVIOUSLY gold will drop - is that you Johnny B?

Tue, 10/12/2010 - 09:10 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The world's economic plate spinners are plainly getting worried here.

This all reminds of when you're driving down a wet and icy road and some animal jumps directly in front of you. First you swerve one way, then the other in ever increasing steering wheel movements. You wind up overcompensating until you land in a ditch. Or you hit a bridge abutment.

I keep thinking that the world is run by very fast computers and monitored by very slow and fallible humans. Guess who will win lose in the end?

Tue, 10/12/2010 - 09:32 | Link to Comment assumptionblindness
assumptionblindness's picture

As a lesson, it is best to keep the steering wheel straight, apply the brakes and turn on the windshield wipers.  It will definitely be a BAD day for the animal but at least you stay on the road and don't risk loosing control of your car.  As a financial analogy, I guess that it is too late for that now...damn.  We are headed for the ditch while the black swan laughs!

Tue, 10/12/2010 - 09:44 | Link to Comment LeBalance
LeBalance's picture

Its fauna dependent: in some climes that may be a Moose.  If it is hitting it has a high probability of being your demise.

And in this instance this headlight paniced furry sweetheart turns out to be Godzilla for most people.

Tue, 10/12/2010 - 09:52 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Many many moons ago, a friend took two years off from college to devote some time to the Peace Corp. He can back to tell me stories of swerving off the dirt roads (dirt paths really) to avoid elephants and rhinos.

In the understatement of the century, he assured me that is wasn't in your best interest to hit them if it could be avoided. :>)

Tue, 10/12/2010 - 10:56 | Link to Comment assumptionblindness
assumptionblindness's picture

I stand corrected.  The lesson is to drive slowly (which was obviously NOT the case) as to avoid that potentially nasty collision with a Moose, Rhino, Elephant or that Anthrax-dusted Black Swan. 

Tue, 10/12/2010 - 09:41 | Link to Comment Djirk
Djirk's picture

Central bank letting the market do it's job?

Tue, 10/12/2010 - 10:06 | Link to Comment Silverhog
Silverhog's picture

You can't rush rigor mortise.

Tue, 10/12/2010 - 10:36 | Link to Comment macholatte
Tue, 10/12/2010 - 12:03 | Link to Comment TuesdayBen
TuesdayBen's picture

The silver lining for me is that 1YR LIBOR, the index on which my mortgage is based, is down to 76bps!  WooHoo

Fri, 10/15/2010 - 02:55 | Link to Comment nikejordan
nikejordan's picture

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