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Parsing Through The ECB's Elimination Of €310 Billion In "Excess" Liquidity
Today's 3 Month Long-Term Refinancing Operation saw a surprisingly low €132 billion in bid interest on behalf of 171 banks. The transaction which is the key bridge to the rolling-off of the 1 Year €442 billion LTRO which matures tomorrow, was expected to see demand for between €150 and 200 billion, yet missed even the low end as the bulk of excess cash had been used for arbitrage opportunities which would be eliminated with the new, shortened maturity. On the other hand, the 171 banks that did participate in the transaction will likely be stigmatized as it means they are likely locked out of the traditional interbank lending market, which has a comparable 3 month rate of 0.76%. On the other hand the LTRO has a fixed 1% rate: the banks are hardly paying the additional 24 basis points because they like JC Trichet so much. Alternatively, we are convinced that none of the 171 banks will fail the most recent scam that is taking Europe by storm, namely the Tim Geithner-inspired "Stress Test", which just like in the US, have already seen their first mandatory leaks of information. Furthermore, the €310 billion in liquidity that is leaving the system is precisely the amount Barclays' analyst Joseph Abate predicted would depart: "Market attention is focused on how much of the €442bn stays at the ECB and how much leaves the program: currently there is about €300bn “surplus” liquidity in the euro area market, and so a full rollover is not theoretically needed." In fact, the lower the roll, simply means that a greater the number of government securities have been pledged elsewhere: "Obviously, the more government securities pledged, the more likely it is the 3m replacement LTRO will be considerably smaller than the €442bn rolling off." In other words, the ECB's recent willingness to accept any garbage as collateral has skewed the usefulness of this liquidity transition operation as indicative of absolutely anything.
As Bloomberg reports, no matter how this data is spun, it will likely result in a spike in short term lending rates:
Today’s loans may see short-term market borrowing costs rise as there is less excess cash in the system, Commerzbank AG analysts said. With “excess liquidity vanishing,” monetary conditions are “perceived to be tightening,” said Christoph Rieger, an interest rate strategist at Commerzbank in Frankfurt.
This conforms with what Lehman's Joseph Abate had said earlier:
Any paper leaving the ECB will need to be funded in the market – which given the global reach of many participating banks, should put upward pressure on Eonia as well as dollar Libor. All things equal, however, the smaller the replacement LTRO is relative to the €442bn roll-off, the more likely it is Libor will increase from 53bp currently.
And even with this allegedly better than expected LTRO outcome, the Libor-OIS spread declined by just 0.01%, from a one year record 0.338% to 0.328%.
Another point: numerous pundits were spinning yesterday's failed Fixed Term Deposit, or QE "sterilization" auction as merely a liquidity-shoring precaution by European banks, and that had the spectre of the LTRO not been overhead, the 0.6 Bid To Cover auction would have passed swimmingly. Well, now we know that's patently not the case, as banks were more than happy to refund liquidity back into the system. In a ironic twist, the stronger today's LTRO came out, the more ominous yesterday's sterilization failure now appears, as all the ECB is doing is taking with one hand, giving with another, and yet somehow in the middle, credibility is lost.
Alas, even after this LTRO result, the very much constrained European liquidity situation is still as bad as ever, and now there is simply €310 billion less of it.
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'Things fall apart. The centre cannot hold'
Anecdotal evidence says mkt participants waiting for sky to fall in, a classic case of bunnies in headlight syndrome. Mkt has put on its Elmer Fudd cap, its wabbit season now...
It went very well, if you consider an amputation to be a successful operation.
With all due respect for your incisive analysis it apprears that the Euro zone banks are rapidly growing themselves into zombies and shrinking their balance sheets, another deflationary symptom.
Europe would be much better off if they just tell Timmy the Tax Evader to stay out of their business. If they act on his words, they are really doomed more than they are now. Why would you listen to an idiot like Geithner or Bernanke, when their own house is in disarray?
Oh, tomorrow will be such an uneventful day ...
http://ftalphaville.ft.com/blog/2010/06/30/274761/the-not-so-big-roll-ov...
Ouch. I smell Goldman´s, JP Morgan´s, Citi´s and BofA´s HFT algos preparing for the short covering ueber-kill. :=)))
Nice summary of this.
For equity traders and anyone watching from the US, the key would be that the 171 banks are probably small & may not appear in the most-watched equity indices. So the bounce we saw is probably justified. However an average of ~1Bn per bank suggests that those banks who are involved are significant users of the facility, as a % of their funding needs.
For US guys I'd suggest its a bit like watching Citi / BofA rally while the problem bank list continues to expand, and the FDIC closes 3 banks a week.
"Lehman's Joseph Abate"? Not recently ;-)
A little off=topic, maybe, Drudge reports Venezuela just nationalized 11 US owned drilling platforms. I think when the EURO turns to dust, rent on Italian, Spanish, and Greek (NAMFI) US military bases will be going up.
Wondering if last night was a blowoff top in U.S. Treasuries?
Get ready for flash crash part II within the next week, if not days.
Why are the equity markets considering the reduced roll-over a "green shoot"?
->yawn<-
scale back a little bit, repo good collateral on the open market, and dump the rest with the ecb. euribor-ois doesn't move. whodathunk?
Another interesting data is deposits at the ECB that have dipped to 300b as of yesterday from 380 early in the month. It will be intersting to see the balance tomorrow. another source of funds? naw.
Certainly a lot of details like that to take into consideration. Thanks windows vps | cheap vps | cheap hosting | forex vps