T-Minus 7 Days To A LIBOR-Induced Liquidity Crunch?

Tyler Durden's picture

Zero Hedge has been discussing the ongoing liquidity constriction around the world over the past month, focusing on Europe and China, where conditions range from icy to outright frozen. One country that has been largely ignored, is our very own USA, where despite the Fed's ongoing liquidity flood, the last few days have seen short-term secured funding in the form of Top Tier Commercial Paper once again jumping to near 2010 highs at 0.43% (see chart). This is in stark contrast with ultra short-dated Treasuries, where 30 Day Bills are just barely yielding 0.05% (and were as low as 0.02% a few days prior).

Yet for all domestic jitters, it appears that the next source of an (il)liquidity crunch will once again come from Europe. As Barclays' Joseph Abate notes, there is one event is on the horizon which could send Libor rates as high as 50% higher. And that event will occur on July 1 - the 1 year anniversary of the ECB's Long-Term Refinancing Operation.

This 371 Day LTRO was created just under a year ago by the ECB to add €442 billion in liquidity to front-end markets. It is precisely this LTRO that facilitated not only the decline in the FRBNY's FX swaps, but the gradual drop in dollar Libor to all time lows. The program was so successful that the ECB followed it up with two other one-year LTROs, yet both much smaller: one for €75 and one for €97 billion. Yet the Halcyon days of well over half a trillion in excess CB-provided liquidity are ending on July 1, and the roll off will be a critical event, which could set off yet another liquidity crunch first in Europe, and then everywhere else.

The first consideration is that the facility will not roll into a comparable unlimited 1 Year tender, but instead into a much shorter 3 month operation. As Abate points out: "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."

And as nobody but JCT really knows what quality collateral is pledging any one euro of circulating money, especially post the complete loosening of A-rating triggers to pledging sovereign debt post the Greece bankruptcy (unlike the broader media, we don't mind calling a spade a spade), the willingness to unwind the facility will speak volumes about Europe's banks:

[Barclays] European analysts reckon that based on the level and regional composition of the liquidity on deposit at the ECB, perhaps as much as € 150bn could leave in search of cheaper financing in the market. Unfortunately, the ECB’s balance sheet figures are less transparent than the Federal Reserve’s, so analysts do not have a strong sense of what types of collateral have been pledged into the facility. Obviously, the more government securities pledged, the more likely it is the 3m replacement LTRO will be considerably smaller than the €442bn rolling off.

Yet no matter how much of the full amount rolls off, there will be an immediate "cliff" event in liquidity needs as the public funding market will be replaced by the private: sorry, Jean-Claude, you can't have your public cake and have the private sector eat it (the cake, not the sector).

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.

Another way of looking at why Libor is set to surge is based on expectations of what is happening behind the scenes, as nobody still have any idea what is really held by the ECB, either in its LTRO, or any other Operational facilities:

Assuming that most of the collateral pledged in the LTRO is lower quality, there might not be much of an exodus out of the facility. Instead, the replacement 3m LTRO could be nearly as large as the original €442bn. Not only would this indicate that banks still have lower quality assets on their balance sheets – but that the decline in market rates since last July has not been broad or deep enough to enable institutions to leave the security of the ECB. Market participants could interpret this as an indication of still high counterparty credit risk. In turn, this would raise FRA-OIS rates – in both Europe and the US as investors reassess credit exposure.

And the piece de resisance is that the imminent disclosure of the European "Stress Tests" will backfire, as they will be announced at a time when liquidity tensions are soaring, and Libor is starting to surge once again.

Credit concerns could also be reignited next month with the release of the EU’s bank stress test results. To the extent that financial markets interpret these results negatively, FRA-OIS might get an additional push higher.

Will all this be sufficient to cause an interbank lending crisis in the US, comparable to that enveloping Spain and soon other European countries? At this point it is still difficult to make a determination, although the two opposing forces of Fed reliquification, and private market stress escalation, will once again certainly be locked in a duel, which will definitely have an impact on all risk assets. Perhaps it is this that tension that has been keeping the market on edge. Either way, keep an eye out on Libor, CP (both US and European), and ultra short dated Bills: despite the Fed's interventions, the broader market will overwhelm a liquidity intervention any day, and the Fed may soon find itself with little if any options to restore liquidity in the broader capital markets, increasingly losing any and all credibility, precisely courtesy of seemingly endless Central bank intervention.

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Cleanclog's picture

And let's not forget the many Tax and revenue anticipation notes (TRANS and TANs) that will need to be issued by California and many of her cities and counties in July.  A lot of debt needing funding or short term bridges.  

Appetite for near junk and junk, even short term, notes is ebbing.  When does tilt occur?  Can't say, but it seems inevitable.

Monkey Craig's picture

Totally agree about the larger issue (muni debt) but why July in particular?

AccreditedEYE's picture

It's all a shell game. They'll have the Fed's issue BAB's to "fill the holes" in muni "infrastructure".

Most muni fiscal calendars are set to July 1st vs. the end of the year.

Hx3's picture

OUCH...break out the WD40?

Monkey Craig's picture

Break out the FED facilities collateralized by Best Buy receivables over 90 days

GovernmentMule's picture

More like a 55 gallon drum of KY

NotAlwaysSo's picture

KY? Not even a pillow for your knees. Take it and like it!

Trimmed Hedge's picture

What a fake dump.

Everything was fine until around 2:00pm, when the market started tanking.

Totally not real.

Al Huxley's picture

So the higher volume selloff is fake, while the low-volume 'rally' of the past few days is real?

dan22's picture

Well, after 2 years of a constant peg and a giant housing bubble combined with a big inflation one it appears that foreign investors and the Chinese that are able to take their money where starting to loose patience.

In an article published on April 29   Vice President of Shenzhen Development bank mentioned that deposits in banks were decreasing since many investors were rushing into the property market.

In a June 21 article  their was a report that the major banks in China have been suffering from significant decreases of RMB deposits in the last c two months. The article also mentions that their was an even larger decrease of foreign exchange deposits.

An older article confirms this news and states that new RMB deposits fell dramatically in the major Chinese banks. It also quoted one of the Chinese bank officials mentioning that it is time to let the Yuan float more freely in order to attract foreign capital.

That is the reason why as reported at Zero Hedge China 1 Month Inter Bank Rate Was At A Multi Year High.

So foreign capital is rushing once again into China to get a quick return on capital. It seems to be a no risk bet. But there is no such think as a capital gain with no risk associated with it, and when the world discovers the risks associated with investing in China they will be in for a nasty surprise.


The End of The Yuan peg- China is Desperately Trying to Attract Foreign Capital in Order to Prevent a Banking Crisis

Nolsgrad's picture

in bull markets days begin weak, end higher. In bear markets days begin strong and end lower. Easy as that.

Mr Lennon Hendrix's picture

"Must...go...to...Waldorf...Astoria....."  Said Barry.  He was trying to read Zerohedge, but was always too fascinated by the advertisements.  "Sir, you must read this site.  It is the key to understanding what the people know we know!"  Gibbs was jovial as usual.  "Bobby, uh, I tried, but every time I open my eyes I can't stop thinking about Cougars, and now the Waldorf!  I need some new Nikes.  Why don't you read it Bobby?"  "Sir, I can't read."  "Oh."  "Sir, maybe if you pretend the articles are on a teleprompter?"  "Already tried that.  Michelle made me pretend she was a teleprompter on our last anniversary.  Doesn't work."  "Haha, good one sir!"  "I wasn't joking."  Barry looked frustrated.  He knew Gibbs was right.  If only someone could crack this thing called Zerohedge.....

"Bobby, get BS on the phone stat."  Gibbs picked the phone up and dialed four digits, and then handed the phone over, but not before making some weird hand gestures.  "What are you doing with your hands."  Barry said as he grabbed the phone.  "Those were military hand signals.  I thought you might like someone around doing military stuff now that McCrystal is gone.  Barry rolled his eyes.

"Hewo?"  "Who is this, Ben?"  "Awe naw dis is Bawknee.  Mista Pwesiden?  Oh me an Bennie werl just havieen tea!  How aw ewe?"  "Just give me the damn Chairman."  "Okidokie, hewr he is!"  The phone was handed to Barry, but not before he heard, "I wiwll be een dee pool waiteen."

"[ahem] Ah yes hello Mr. President."  "BS, look, we have a problem.  I am trying to crack secret codes on line but am having trouble....maybe I shut just shut this whole thing down!  Please get on your ipad and go to zerohedge.com."  OK..."  "Ok, tell me what you see."

"Oh uh.  Liquidity crunch?  But the printing press...is it broken???  What, FIAT isn't doing the job?  Hmmm maybe I should resign too!"  "Was that a fucking joke?"  "ahhh...did I say that out loud?...Yes it was, I was joking.  Mr. President there will be no problem.  We will merely trade dollars for Euros tomorrow, and the Chinese will have to abide in our liquidity trap.  It is peachy!"  "Thats it?  Isn't that what you do everyday?"  "Yes well, you know with the fourth coming up, I am sure the rational consumers will spend spend spend!"  "OK BS as long as you say so."  Barry paused.  "We're counting on you."  "Thank you sir."  "No thank you!"  "Ah, you're welcome sir."  "BS?"  "Yes sir?"  "Don't leave me."  "I won't sir."  "You promise?"  "Yes sir."  "Say you promise."  "I promise."  Barry sighed deeply.  "Ok, it's all going to be ok!"  He slammed the phone down and stood up.  Gibbs was staring at him wide eyed with his head cocked.  "Bobby, get me some champagne.  We're gonna celebrate!"  "Yes sir!"  Gibbs left the room, closing the door gently behind him.  Barry walked to the radio and put on "Goodbye Horses." 

"I am going to make it.  They will love me once again."

AccreditedEYE's picture

What, FIAT isn't doing the job?  Hmmm maybe I should resign too!"  "Was that a fucking joke?"  "ahhh...did I say that out loud?...Yes it was, I was joking.  Mr. President there will be no problem.

AAHHAHAHAHAHA! F-ing Fantastic!


Translational Lift's picture

I just pissed my pants ROTFLMAO......please don't do that again....not!

Duuude's picture



Backflip BellySnort !!!!

Apostate's picture

Thanks for giving us the transcript on the wire tap, Lennon, your service has been invaluable. 

Carl Marks's picture

Not a problem for gold bugs.

Cheeky Bastard's picture

What I'm worried about is the consequence IBR surges will have on the derivatives. Don't forget many of the idiot quants used probability model to price them, and left non-arbitrage sitting in the corner.

Using LIBOR as benchmark risk-free reference is beyond fucking idiotic and when/if LIBOR sees 08 highs you will again see spreads in HY going north of a 1000 [on avg] and in IG north of 500 [avg].

And that will only prolong the death spiral [the same as it did in 08 since no one used treasuries to price derivatives [which would make spreads significantly lower and the consequences less severe] but fucking LIBOR which was re-visiting its historic highs when adjusted for FED benchmark interest rates]].

This time 700B will not suffice since the contracts outstanding are 32% higher than the volume of the contracts outstanding in 08; and since basically nothing has changed since 08 [except for the goddamn ZIRP introduction] you clearly see where this will lead.

Sure it will be good for gold, but not even gold carry [which Chi-Banks are trying to do to mitigate the illiquid IBR market] will not do the trick.

Tyler watch how this debt auction goes Friday; if the most recent 2y5y sov. debt auction was indicative of anything; it will be tight as never before. If it fails [note, its an intebrank auction of long-term debt] SHTF and PBoC bond buybacks will explode. 


Also, with the most recent debt offering by BAC, HSBC [perps] and JPMC it smells awfully like they are building cash reserves in order to protect, or rather to hedge, any SHTF occurrences in LIBOR.

jdrose1985's picture

watch the 2 yr go negative as oil falls to $20bbl late this yr LOL


PeterB's picture

Dollar revival coming soon

Psquared's picture

Nothing will happen. They will find a way to roll it all over. As soon as the economy picks up steam and tax rates go up government coffers will be overflowing with cash and debts will be paid down. Of course, everyone will be broke the following year, but that, as they say, is NEXT year.

Just keep kicking the can down the road. I think they can figure out ways to do this ad infinitum.

mikla's picture

Just keep kicking the can down the road. I think they can figure out ways to do this ad infinitum.

They really can't.  Like Cheeky Bastard says above, the contracts outstanding are 32% higher than the volume of the contracts outstanding in '08.  They are doubling-down.  They are leveraging up.  Things are worse now than before, increasingly, every day.

These are governments:  They have limits as to what they can do in securing cashflow.  The feedback guarantees a bond market dislocation (it's only a matter of "when").

It's like Mario Kart ... everybody is racing down the road, at top speed, trying to dodge the turtle shells and banana peels.  The July 1 LIBOR crunch is merely another banana peel.  And, hitting any ONE banana peel can trigger the SUDDEN STOP.

I've been impressed that they've lapped the track a couple times since '07.  However, the game is speeding up, and there are more and bigger turtle shells and banana peels each time you go around, because none of them are cleared from the track (we are merely rolling increasing sovereign debt, and the roll gets bigger each time we come around the track).

The Rock's picture

LOL. Excellent analogy!!

saulysw's picture


I wonder what this "SUDDEN STOP" will look like?

mikla's picture

I wonder what this "SUDDEN STOP" will look like?

Iceland had this SUDDEN STOP.  It took hours.  The result:  Currency is gone, government was removed, and all contracts/debts are in "default" with continuing claims (creditor "bitching") in "limbo".

Commonly, the government will be removed a few times during this upheaval, as the reality is that there is no solution.  (People will not accept ruling from what they perceive to be an illegitimate government making impossible demands.)  We are similarly seeing this in Iceland.

Fast forward:  The IMF is trying to coax them into entering indentured servitude for eternity, various "political" people are trying to restore some sense of "the way it was before", but the populace is currently refusing to honor foreign debts (which mathematically cannot be honored).  Other countries are trying to decide if they should try to "punish" Iceland to get blood out of a turnip, or if they should run to Iceland at top-speed to invest capital (because with no past debt to service, it's an investor's paradise with tremendous opportunity).

It's a mess.  However, we have seen similar things in the recent past with Argentina and Russia, and yes, even Zimbabwe (which became a great place to invest once they decided they would repudiate all old debt).

You will see the same thing in Greece, Portugal, Spain, etc., and throughout the world.

It is a question as to social, cultural, and national structure when "everybody" does this default, but that's what you will get (all major countries will default, and probably the US will default last, I'm guessing before the end of 2012).

Turd Ferguson's picture

Not so fast, my friend. The challenge of maintaining the illusion is getting geometrically more difficult. Yes, they may survive July but maybe not August and probably not September and certainly not October...

UncleFester's picture

But we all agree they will try and manage the perception at least until the November elections.  Extend and Pretend is not designed for eternity...What's their next move?

Iam_Silverman's picture


"they will try and manage the perception"

Unless they slowly explain the onus of a failed auction on Americas Got Talent or Big Brother, how many "MareKinz" are going to have a clue?

Hello fellow Americans.  We have a problem.  Remember how you used to get a new credit card every few months and do the balance transfer thing?  Well, we tried that too, only now - no one will give us a new credit card with a higher credit limit!....

johngaltfla's picture

Cool! A Libor surge right as the next major wave of ARM resets begins! That should just work out DUCKY for all the people who used ARMs to refi and purchased homes during the housing boom peak!

I've got to get more beer and popcorn, this will not be dull. This will be like watching NASCAR after someone sprayed grease on the 4th turn heading into the straightaway.

The Rock's picture

Can they wait a few more days until the 4th?  It will provide some nice fireworks on this side of the pond.  The French "football" team and perhaps even the English (depending on tomorrow's results) can help set it up...

illyia's picture

Sinclair has quite the observation, from a reader, regards global liquidity and BP.


DoChenRollingBearing's picture

Buy gold, and you will feel better soon.  The more the better.  So simple.

Zina's picture
Hmmm... Liquidity Crunch... It reminds me of the good old days of the 2007 "credit crunch"?

Do you remember when the Credit Crunch was on the headlines?

Back  to 2007:



Mentaliusanything's picture

A credit crunch can be fixed over time with the printing of credit (think being given a new Platinum Card)

A liquidity crunch cannot be fixed because liquidity is real money. once it's gone, its gone. (think losing your ability to make a repayment through total loss of income)

No one - even God can get credit without an income to service it.

BP is becoming more illiquid every day even though it has some family silver to sell, divesting yourself of income producing assets is the road to ruin.

Never Never Never spend Capital for once you do you reduce your buffering income. 

Bankruptcy comes to small people and Big Companies the same way. - BURN RATE of CASH 

SDRII's picture

JPM has new "global" strategy - file under if a tree falls...



From NYT:

"Earlier this year, it (JPM) bought a commodities trading unit from the Royal Bank of Scotland. It plans to buy Gávea Investments, a Brazilian asset management firm. And last week, it announced an investment banking joint venture with First Capital Securities of China."

Will China and Brazil (among others) capitulate to allowing JPM (US megabanks) into the market in any meaningful way. The "strategy" appears utterly haphazard and rushed - not a little ironic that Dimon is lauded for his strategy role at Citi. This as GS out with call that Shanghai is the New New York. 


The US has been trying to claw down the China/India banking restrictions (see rediff article and AIG connection) for decades (China WTO entry was explicitly contingent on the fin services). Today China Daily carried an article talking about  more restrictions in the online payment/network companies. Likewise, Bloomberg ran article saying Brazil wants to restrict foreign land ownership. Moreover the US trade rep in China is theatening action of rare earth export ban.










buzzsaw99's picture

No problem, dial:




Ask for Jon Clawed Tree Shade. Tell him buzzsaw99 sent you.

Weimar Ben Bernanke's picture

oh shit......................................

jmc8888's picture

LaRouche thinks so

Wed, 06/16/2010 - 10:29am
Eurosystem Heading Toward July 1 Liquidity Shock



I would have to agree, but who knows if the brand new 2011 model printing press delivered to Europe by then.

Doesn't look good, especially when ZH and LaRouche are eyeing the same events.


Apostate's picture

I'm shocked that the LaRouche cult still thrives.

Can someone explain to me the obsession with NASA? Actually, don't explain it to me.