Eurozone

European bourses are trading in positive territory ahead of the North American following a relatively quiet morning in Europe. Markets are led by the financials sector, currently trading up around 1.10%. This follows yesterday’s ECB LTRO. As such, the 3-month Euribor fix has fallen to 0.967%, a significant fall in inter-bank lending costs. PMI Manufacturing data released earlier today came in roughly in line with preliminary estimates. The Eurozone unemployment rate for February has also been released, showing the highest jobless rate since October 1997. There has been little in the way of currency moves so far in the session; however there may be fluctuations in USD pairs following the release of ISM Manufacturing data and weekly jobless claims later today.

Goldman waited exactly 20 minutes to try to comfort the market, especially the EURUSD which is getting increasingly jittery, that €1 trillion in Discount Window borrowings is a "positive." We beg to differ that trillions in more debt collateralized by candy bar boxes and condoms will cure an excess debt problem, especially with all the good collateral now gone, and we are confident that ongoing deleveraging needs will put a major cog in the system, especially since the only liquidity expansion move now is "fade", at least until the next major crisis.

While the now scheduled Irish referendum on the fiscal treaty, which will likely not pass successfully absent major concessions on behalf of Europe, will not precipitate a failure of the recently agree upon compact, as 12 out of the 17 contracting parties need to support the Eurozone, it will have an impact in that it would impact future bailouts of Ireland courtesy of preset European bailout mechanisms. In other words, should things take a turn for the worse, and they will, in the near future, Ireland will have to rely on itself to save itself. As a reminder, it took Europe 2 years to (supposedly) firewall itself from default and a collapse of its banks. How long will the same take for Ireland, because while the country may be standalone, its banks most certainly will not be. Remember that money is fungible. So are massive unrecognized Mark to Market losses. Morgan Stanley explains.

Just as we scripted, the temptation to migrate from the status quo in Europe was just too high for the other peripherals and Ireland just gained first / next mover advantage by daring top mention the "R" word. As Bloomberg notes:

• *IRELAND TO HOLD VOTE ON EU FISCAL COMPACT, KENNY SAYS

We would imagine that Barroso and his pals are scrambling now that another 'Referendum' is on the cards (and we are checking what 'referendum' is in Portuguese) and while fascism in perpetuity has been priced into Euro, the possibility that democracy rears its ugly head has just sent the EURUSD tumbling.

Stocks advanced as market participants looked forward to tomorrow’s 3yr LTRO by the ECB where the street expects EU banks to borrow around EUR 400-500bln. All ten sectors traded in positive territory for much of the session, however less than impressive demand for the latest Italian government paper saw equity indices lose some of the upside traction. Of note, the ECB allotted EUR 29.469bln in 7-day operation, as well as EUR 134bln for 1-day in bridge to 3yr loans. In other new, although Portugal's finance minister announced the country has passed its 3rd bailout review by the EU/IMF, this did not stop S&P's Kraemer saying that if there is a probability of default, it is higher in Portugal than in any other Euro-Zone country.

From S&P: "We lowered our sovereign credit ratings on Greece to 'SD' following the Greek government's retroactive insertion of collective action clauses (CACs) in the documentation of certain series of its sovereign debt on Feb. 23, 2012....We do not generally view CACs (to the extent that they are included in an original issuance) as changing a government's incentive to pay its obligations in full and on time. However, we believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange. Indeed, Greece launched such an exchange offer on Feb. 24, 2012." Translation: Greece better have that PSI in the bag or else the "Selective" goes away and "Greece would face an imminent outright payment default." Our question for former Goldmanite and current ECB head Mario Dragi: does the ECB allow defaulted bonds to be pledged as collateral within the Euro System?

"It Is completely ironic that we would be experiencing one of the most powerful cyclical upswings in the stock market since the recession ended at a time when we are clearly coming off the poorest quarter for earnings... There is this pervasive view that the U.S. economy is in better shape because a 2.2% sliver of GDP called the housing market is showing nascent signs of recovery. What about the 70% called the consumer?...Let's keep in mind that the jump in crude prices has occurred even with the Saudis producing at its fastest clip in 30 years - underscoring how tight the backdrop is... Throw in rising gasoline prices and real incomes are in a squeeze, and there is precious little room for the personal savings rate to decline from current low levels." - David Rosenberg

With the second version of the ECB's enhanced LTRO (back-door QE) starting tomorrow, there has been a great deal of speculation on what the take-up will be, what banks will do with the funds they receive, and more importantly how will this effect global asset markets. SocGen provides a comprehensive top-down analysis of the drivers of LTRO demand, the likely uses of those funds, and estimates how much of this will be used to finance the carry trade (placebo or no placebo). Italian (25%) and Spanish (20%) banks are unsurprisingly at the forefront in their take-up of ECB liquidity (likely undertaking the M.A.D. reach-around carry trade ) and have been since long before the first LTRO. On the other side, German banks have dramatically reduced their collective share of ECB liquidity from 30% to only 6%. SocGen skews their detailed forecast to EUR300-400bn, disappointing relative to the near EUR500bn consensus - and so likely modestly bad news for risk assets. Furthermore, they expect around EUR116bn of this to be used for carry trade 'revenue' production which will however lead to only a 0.6% improvement in sectoral equity levels (though some banks will benefit more than others), as they discuss the misunderstanding of LTRO-to-ECB-deposit facility rotation. We, however, remind readers that collateralized (and self-subordinating) debt is not a substitute for capital and if the ECB adamantly defines this as the last enhanced LTRO (until the next one of course) then European banks face an uphill battle without that crutch - whether or not they even have collateral to post. Its further important to note that LTRO 2 cannot be wholly disentangled from the March 1-2 EU Summit event risk and we fear expectations, priced into markets, are a little excessive. We suspect this will not be a Goldilocks 'just right' moment.

With an economy of just $3.2Tn versus the United States $14.3Tn Germany is trying to prop up a Eurozone that is more than one trillion dollars bigger than America. They just do not have the resources for the task they are undertaking and I predict serious consequences, eventually, from their efforts. Germany is “best of class” and will be the last to go but they cannot evade the European recession in the end and I think it is only a matter of time and unfortunate decisions before the austerity demands made on so many will wind their way back home to those who made the demands. They used a timeline that was much too short for the job at hand and payment will eventually be forced upon them. They obviously get the joke where Eurobonds and other ploys of this nature average the economies of Europe and the standards of living over some period of time so that Germany, in the end, will suffer most as they have the furthest to fall. They have approached the G-20, China, the emerging market countries and all polite responses to the side; the results have been about zip. The Germans are running out of both time and money and Franz is squirming in the beer hall.

• Germany Crisis Role in Focus After G-20 Rebuff (Bloomberg)
• G20 to Europe: Show us the money (Reuters)
• Draghi’s Unlimited Loans Are No Panacea (Bloomberg)
• Geithner says Europe has lowered risks of "catastrophe" (Reuters)
• Gone in 22 Seconds (WSJ)
• Gillard beats Rudd to stay Australian PM (FT)
• Brazil Will Continue Reducing Interest Rates, Tombini Says (Bloomberg)
• China to Have ‘Soft Landing’ Soon: Zoellick (Bloomberg)
• China To Be Largest Economy Before 2030: World Bank (Reuters)
• Obama pressed to open emergency oil stocks (FT)

While we are aware of politicians' repeated vows about the uniqueness of the Greek case, we remain deeply skeptical. After all, hasn't it been a winning investment strategy to assume that the exact opposite of whatever Europe's elite says will become fact? The recently overheard and filmed conversation between Germany's and Portugal's finmins (http://t.co/iDA9HJPo) points in the direction of an imminent review of the Portuguese case and might be a harbinger of PSI, OSI etc à la Gréce. And why stop there? Why not relieve the Italians, Spaniards, Portuguese etc. of their troublesome load? Wouldn't it be nice to pull a Greek and finally make it for those pesky Maastricht criteria? But regardless of one's view on the ongoing crisis, it makes perfect sense to go where no investor has gone before. We did the unthinkable, read the unreadable and made it back alive to tell the tale: we ploughed through all of the individual bond prospectuses of our favorite list of countries in peril and actually found a lot of useful information for the investor. Given that the sovereign bonds of the Eurozone used to be looked at as riskless assets, it is safe to assume that the exercise hasn't been done by a lot of investors on a regular basis. Judging by the difficulty to even obtain the information, both the interest of investors to obtain it and that of issuers and underwriters to provide it has been and remains extremely limited.

The 1922 German hyperinflation experience was undoubtedly propelled by printing massive amounts of money. Yet, the Japanese money printing experience has had no impact whatsoever on inflation. Here we are in 2012, and the World’s four main central banks (USA, Britain, Europe and Japan) continue to print gobs of money. Will the outcome be 1922 Germany or 1990 Japan?...The bottom line is as follows – the combination of the bursting of property prices and the refusal of the big banks to write-off the corresponding bad debt is resulting in a big wave of deflation. We expect this to continue. Yet, we also are mindful enough to know that pockets of inflation will occur in various countries and within various industries. The real threat of hyper inflation will occur when a major currency collapses. Any country that leaves the Eurozone will undoubtedly see extreme inflation during their transition years. Outside of the Euro-zone, Britain remains at risk due to it being a key center of global finance and at risk should the World’s super-size banks implode once again.

My advice is to put all of the headlines aside because they are not accurate. No deal has actually been struck and there is just the possibility of one at present. The PSI is also nowhere near certain. There has certainly been a proposal made with innumerable and probably impossible conditions to be met by Greece including a demand for a Constitutional change, which under the current Constitution, cannot even be voted on until 2013. I often wonder if Europe really wants to bail Greece out or if Germany is not forcing so many conditions that they are trying to have them exit the Euro on their own so the Germans are not seen as the Lord High Executioner; to quote Mr. Gilbert & Sullivan.

And it was brutal. No more diplomatic niceties.

The record volatility, and 400 point up and down days in the DJIA of last summer seem like a lifetime ago, having been replaced by a smooth, unperturbed, 45 degree-inclined see of stock market appreciation, rising purely on the $2 trillion or so in liquidity pumped into global markets by the central printers, ever since Italy threatened to blow up the Ponzi last fall. In short - we have once again hit peak complacency. Yet with crude now matching every liquidity injection tick for tick (and then some: Crude's WTI return is now higher than that of stocks), there is absolutely no more space for the world central banks to inject any more stock appreciation without blowing up Obama's reelection chances (and you can be sure they know it). Suddenly the market finds itself without an explicit backstop. So what are some of the "realizations" that can pop the complacency bubble leading to a stock market plunge, and filling the liquidity-filled gap? Here are, courtesy of David Rosenberg, six distinct hurdles that loom ever closer on the horizon, and having been ignored for too long, courtesy of Bernanke et cie, will almost certainly become the market's preoccupation all too soon.