LTRO Post-Mortem: Who Repaid What, As European Excess Cash Is Now Reabsorbed

Tyler Durden's picture

Before today's NFP number, the biggest news of the day was the substantial slowdown in European LTRO repayments, which ground to a halt from last week's repayment of €137 billion, to only €3 billion. Whether this is because banks decided that there is no more need to telegraph their health by keeping "excess liquidity", or because they actually did need to €878 billion in additional LTRO funding is unclear for now, although the overnight nationalization of a Dutch bank coupled with a return of Italian bank problems where Monte Paschi is next on the nationalization conveyer indicates that as always, nothing has been fixed in Europe. A full post-mortem of today's second LTRO repayment comes from Goldman, which concludes that as of the two repayments, the excess cash in the European financial sector is now in tune with the open market operations' reduction. When the next scramble for liquidity hits, it means that banks in the continent will once again start crawling to the ECB for incremental cash.

From Goldman Sachs:

€3 bn in the second putback, €878 bn left


Today (February 1) at 11:00 GMT, the ECB announced the LTRO funds returned to it through the (second) weekly put-back option. Banks repaid €3 bn, leaving €878 bn outstanding. The scope of this week repayment‘s is close to nil. Last week, banks used the initial repayment option to send a "health signal" and repaid €137 bn. Going forward, our expectation is for repayments to track today’s tempo, as banks carefully weigh funding costs achievable through market bond issuance with those of the ECB.


Spanish banks repay €41 bn…


Spanish banks under our coverage will repay €41 bn of LTRO in January, or c.1/3 of the initial take-up. This is essentially due to Santander and BBVA (€32 bn), for which funding conditions have improved most. Domestic banks will repay a total of €9 bn or 12% of initial take-up. While a positive from a signaling perspective, we view the Spanish repayments as earnings dilutive, and risky. We believe it would have been preferable for Spanish banks to have held onto the ECB funds for longer.


… some core banks exited LTRO all together


Core banks are likely to be the largest source of repayments. Commerzbank and KBC have announced their LTRO return to the ECB, and we expect further similar announcements together with the results season.


Signaling and maturity are crucial


Without time pressure, a putback decision is driven by economics. We believe that for peripheral banks, LTRO money continues to  offer an attractive reinvestment proposition.


Moreover, we believe the banks will use 4Q2012 results to outline a longer-term path of repayments, in order to signal their ‘resilience’.


Finally, with two years remaining, LTRO remains an attractive facility for the majority of banks, which cannot achieve comparable terms in the funding market. But in a year’s time, this is unlikely to be the case. We believe a longer-term exit path will be the most likely outcome.

And the accompanying charts.

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Whiteshadowmovement's picture

Euro to infinity and beyond!

Ghordius's picture

not required. just stabeeleetee, thank you very much - or at least as much as possible, in this world full of monetary wizards

Whiteshadowmovement's picture

Hey Ghordius,

I was reading that conversation with slewie you link to on your profile page where you said ths:

"Germany can't leave NATO and is not willing to lose diplomatic ground by ever even been percieved as not putting effort in the EU and the EZ.

There is one country on this world that could lead us to a completely different set of agreements, and it's the USA.

The EU and the EZ are nothing else than mechanisms to make the best out of the fact that the US is the hegemon of the world. And they have some quite clear uses that you might not perceive if you don't live here."

I think your 100% on the money and being European myself I understand exactly where you are coming from.

BUT Id really like to ask you is why the European mind is so obsessed with a "strong" euro. They feel it vindicates the whole experiment. They also feel it finally proves those primitive American naysayers wrong.

All my German investors think the euro is the D-mark reborn.

Isnt there a huge disconnect between the fact that Europe would massively benefit from allowing the currency to weaken ($1.25 should still be ok on the big mac index and allow europes exporters a chance to "grow" through that), and that a weak currency doesnt necessarily mean the whole EZ experiment is "losing face"

I dont understand why even they hype up the fact that a declining euro means an imminent break apart. I mean hell im not saying we need parity for the euro but I really think part of its peristent strength is European vanity.

Any thoughts?

Dr. Engali's picture

As an outsider looking in I think that a stronger Euro gives the poorer countries buying power . Being that 71% Germany's export trade is inside the Eurozone it would be in their best interest if the bring down the cost of imports through a strong Euro. In my view the problem is the structuring of the Euro. The EU  nations need to agree to give up their sovereignty to a cental authority so they can issue bonds.

Ghordius's picture

mhh... that German trade is normally more fifty-fifty, and actually it's expected to return so in time

your proposal has one problem: we don't want to have eurobonds, they would decrease our chances of balanced budgets and result in the shift of our militaries into the center, with further weakening of our confederate structures

Ghordius's picture

wow, that is a very old conversation, haven't updated there since ages. an answer needs to go through several planes

- politically, the German "sentiment" you describe is important. the deal between France, Italy and Germany was this: Support for German ReUnification in exchange for the Deutsche Mark's entry in the EUR (with HQ in Frankfurt). the UK was fuming and the US was undecided, at that time. The Germans feel - rightly - that they paid a price, and they always asked for BundesBank traditions to continue (with the French and Italians nodding enthusiastically)

- industrially, the peculiar needs of the SME industries, particularly in the "core" (all around Switzerland): FX stability & sensible industrial credit - Germany will never forget that those companies are the real motor of their fabled industry (actually they just happen to have the biggest share of them - and no, most of them are family owned and you can't buy them on the stock exchanges) and they are highly interconnected - they were even when they operated with 7 currencies (but it hurt). now entrepreneurs open without further thought small production plants in Croatia that deliver parts for let's say BMW, to give you an idea

- monetarily, we believe to know from our history that all those shenigans with debasing the currency "for export growth" are just palliative and transitory. in the long run, either you produce value or you don't (and this value is often quality, and for that you need tight cost control or you go bust). and if you play too long the FX game (together with other idiocies) your industry leaves your country. so the huge benefit is not seen with those eyes

- emotionally, the whole thing is meant to be conforting. in the sense of "whatever our American cousins do, we'll keep our waters stable", but there is special confort in seeing the currency steadily declining less than others. enter the USD and gold prices - and the EURUSD at roughly 1.33 as the "right price"

- breakup: Germany, France and Italy haven't forgotten their core deal, i.e. a German-flavoured EUR for ReUnification and full peerhood. Or perhaps I should say "sisterhood". That's the reason why the ECB is in Frankfurt and why the last president was the French Trichet and now it's the Italian Draghi. All the other 14 (though aware and sympathetic) could leave without any big fuss (I know, the financial media thinks otherwise, including Tyler). So a real breakup is only possible if the EUR goes too far down (Germany) or too far up (Italy). But mid-term, it's job is to shadow the global reserve currency, less violently and less far down, avoiding the US policies that bring hyperinflation risks (at which point it would be bye bye, see you with your new currency, or, if you wish so, gold)

- The Crisis: I'm aware that I should write something about that, but I just realize it would take pages, and involves a lot of opportunistic tactical maneuvers driven by banking scandals soo..

...I hope it's what you were asking for

Whiteshadowmovement's picture

Ghordius, thank you very much for the time you put into the reply. Let me come a bit closer to my point, if you wouldnt mind. All big picture perspectives you provide in terms of political sentiment and historical overview are quite germane but let me put it like this. I think the bottom line is *at the moment* I think its clear a lower but firm (very important) euro would be much in Europes interest. I watched DAX earnings quite closely and several companies (eg BASF) came out directly and essentially said they expect a very good part of their earnings growth to come from a weaker euro in 2013. The only hope to push up earnings because as we see from the collapse retail sales and car registrations etc. It will be VERY difficult to grow sales within Europe.

So again, I get the idea that one shouldnt play the FX game too long and that in such circumstances value leaves your country (the italian lira) but Im not even saying parity, Im saying rationally speaking the Europeans should essentially behave just like the Swiss and pick a low but respectable exchange rate target.

Further, if we do a quick gedankenexperiment about what the D-Mark would look today, it would be extremely difficult to imagine it would behave any differently from the CHF, essentially forcing German to do what the Swiss do.

How in the world can it be that Europeans really seem to think they are the only ones who have a good strategy in playing the currency 'race to the bottom' game by letting their currency appreciate. I mean look at Japan.

Even inflation is not a problem right now.

Can you see any beneficial tactical reason to play the currency war this way other than vanity and pride. I really think Europeans still believe its pre-2008 and strong Euro is the emblem of European hegemony

Also I think there was never even a chance of euro breakup and I always assumed EU politicians only made this noise *for the very purpose* of pushing the euro down.

PS- doc, I thik Ghordius is right about internal trade balande etc. I think there is very little, if any, benefit at the margin to having a strong euro in that respect

Ghordius's picture

I'll give you a longer answer, but one thing: without the EUR, even the great DM would only be a medium-weight, with no other anchor than the USD, and that is a complete different sets of dangers in a currency war

and pegging to an anchor - as the CHF is doing with the EUR - and you lose independence, and so part of your control

usable for tactics, but you can't have a proper strategy if you increase your dependencies

Whiteshadowmovement's picture

Sure, but I really dont think the euro is amheavy weight in any real sense. As you said in the beginning:

"The EU and the EZ are nothing else than mechanisms to make the best out of the fact that the US is the hegemon of the world"

Right. So if all you do have to play is the "strength" card for the currency (which I think is taken by Europeans as a direct barometer for their hegemony efforts) or otherwise you lose independence as you pointed out, what good is the whole damn experiment? As you said, the benefit of the whole Euro experiment is get something from dollar hegemony. If that something isnt a competitive edge in terms of comparative value, whats the point?

Also I of course shouldnt leave out the fact that in normal circumstances the strong euro is also used to fight inflation but that should not be an issue at the moment...

Ghordius's picture

ah, then I can perhaps clarify: you can't take monetary hegemony away, you can't steal it. monetary hegemony is mainly based on goodwill and soft (trading) power

you can spend it, sure, the way Uncle Sam is doing it, giving it away for short-term goal

but it will either be given to you or nothing

and the way a national bank treats the markets is crucial, in this, and there enters tradition, and not playing too much short term like a trader

you are not for profit in this biz - not through the cb

the whole thing is about state power, at the end, and diplomacy

Whiteshadowmovement's picture

Thanks Ghordius, let me say again I really think you understand the European mentality better than anyone. Also though a European by birth, it seems to me my years living abroad seem to have corrupted my appreciation for this somewhat.

What about the Cantillon effect though, the first to issue more currency (or debase, which is a different side of the same coin) gets the most proportional gain. Surely you can see how this is played on a grand scale by cb's, and since the Dollar is THE reserve currency (Roueffs exorbitant privilege if you will) its designed to benefit first by money printing. What possible advantage does Europe have in being the last?

Ghordius's picture

a somewhat intact and functional economy - less risks - less blame "in case"
don't forget that it's also a form of tribute in exchange of imperial defense - one that has not to be explained to the citizenship
if you have the carriers, you get the Cantillon

but this is the easy part of a currency conflict anyway. the sweet part

Whiteshadowmovement's picture

I dont really know Ghordius, is Europes economy really any more intact and functional due to its strategy than any of the other plqyers of the currency wars. Im not really convinced that one can demonstrate empirically that a strong currency (in times of low inflqtion) leads to a more functional and intact economy.

Thanks once more for your thoughts and time, much appreciated!

tip e. canoe's picture

goodwill : a term that is unfortunately never mentioned when discussing economics these days.

missing link perhaps?

Ghordius's picture

"the benefit of the whole Euro experiment is get something from dollar hegemony" I strongly disagree
It's the other way round, it's about not getting *insane* risks from it, either by changes in it's execution, nor by failures in it's execution, nor by a sudden loss of it

watch the Brits. They are already muttering that "someone" might "throw the Pound under the bus" - mainly because so many City superstars are already openly dreaming of throwing the Yen "under the bus"

watch the Japanese. and all the sharks circling them, with the supercharged leverage of financial institutions freshly engorged of the cheap credit of an unprecedented monetary inflation

It's a jungle, out there, and it's slippery on the floor

I don't know if the ECB will engage some steps to lower the EURUSD or not, but I can tell you that doing it at this stage would not be a classic move in the national bank tradition, the "generally & historical approved principles"

stability does NOT mean catching short term advantages, it means providing a sustainable and safe service to the real economy, where price calculation is possible. otherwise you WILL create bubbles and misinvestments

a national bank outside the range of 4% to 8% lending rates is already in extreme territory, historically. don't forget that

Whiteshadowmovement's picture

But Ghordius dont you think the Europeans have well capitulated on the idea of not creating bubbles. i mean come on look at the stratospheric multiple expansions in EU equity markets in 2012 (DAX from 11x to 15x). I think for this same concept of European pride, Europeans are more than happy to accept bubbles in equity and debt markets but they reject the idea that they can have an underperforming currency during times of low inflation.

I understand the point about deflecting risk from Dollar hegemoney (eg a strong euro offsets inflation etc.) but in this particular case I see absolutely no benefit to a euro above $1.25 . You could leave it there for a good year and still claim stability and calm everybody down about a possible (never goint to happen) EZ breakup.

I suppose the inflation outlook is a big part of it. Perhaps i am just at odds here with the consensus you are presenting rather well because I see this as an unlikely outcome in the near future.

Ghordius's picture

to be frank I have the impression you have misunderstood quite a few of the core messages I'm trying to give - must be my fault

you seem very focused on what the ECB does, and it's direct effects, short and medium term - which are all tactics

you seem to neglect, in my eyes, the longterm mandate, which is the strategy

but hey, my point of view is only that of an amateur history scholar, so it could well be that your point of view is more useful anyway

Whiteshadowmovement's picture

Thanks again Ghordius, I really do appreciate your time!

I think you misunderstand me as well slightly as I am actually not that focused on the ECB as I think its direct actions in terms of market interventions are not nearly as useful as politicians like Draghi (he is a politician afterall) coming out and saying "believe me". So what I would somehow be expecting politicians to do all over Europe is to talk stability up from one side of their mouths and the currency down with the other. As we know even hints of policy are "big news" for the markets. So why allow the euro to appreciate so rapidly (other than European pride) when they could be using some of this soft power and other such tactics to drive the euro to a respectable $1.25 and keep it there?

To put it shortly: wouldnt the most logical thing of all be to inspire confidence and stabeeleety through continuing to pump EU equity and credit markets BUT at the same time rig the currency (through the help of the BIS, the ECB doesnt even need to be involved) so it floats respectably in the mid-1.20's

Isnt the idea that a euro rally MUST go hand in hand with an EU equity rally (and consequently a rising euro is the one and only barometer of the "success" of the euro project) a specious line of reasoning at best?

Itch's picture

Mr Stolpper is about to lose his virginity....we'll get him a cake with one candle on it.

Whiteshadowmovement's picture

Just 2 more pips ...... (balloon drop)

I hope Goldman keeps him around... After all he isnt worth anything if his inverse cristal ball is ruined.

Itch's picture

Eurjpy has past going parabolic...its just gone paraplegic.

ReptilianSlaveMaster's picture

AAPL dropping 40%, FB dropping 50% .. 2012 and 2013 was indeed our repeat of 2008 but now we can finally move forward with renwed strong leadership from Obama and the honorable Harry Reid

LawsofPhysics's picture

LMFAO!!!  The whole problem is that no one has really "paid" anything!!!  All I see are paper fucking promises (created out of thin air in an instant).  Show me the fucking collateral and physical assets bitches!!!

buzzsaw99's picture

The squid holding company speaketh. Parasites.

Broccoli's picture

One of the timeless strategies for curing drug addicts is to keep giving them money with no strings attached.

LongSoupLine's picture

Who paid fucking what?  With who's fucking money?  From where?


A fucking illegal ponzi shell game.  These EU and ECB fuckers can fuck off and stick their fucking heads in a meat grinder.  Fucking crooked shit smelling fucking pukes.  Fuck off.

Inthemix96's picture

Good fucking god,

Longsoupline, you are more angry than me.  Fucking crack on fella, I love your enthusiasm and outright vulgarity.

Fucking mint.  Whos fucking money indeed, because you can be guaranteed it wasnt the fucking theiving inbred fuckers own money they gambled away the fucking cunts.  It was probably mine and your pensions they just fucking pissed up the wall.


falak pema's picture

does god do it all the time?


Catullus's picture

Explaining euro strength and dollar weakens while PMs languish. Feels like big cash demands in Europe right now. This equity rally continues until Europe begins repatriation of dollar denenomiated assets or the euro throws up and gives it back.

Wilcat Dafoe's picture

One thing I don't understand (okay there's tons I don't understand) is why economists don't seem to ever espouse that all these banks sitting on cash give out lots of 'micro' loans... for example, probably lots of people could use a low interest loan for their small business, or to keep the lights on as they look for work... and doesn't that "stimulate the economy" as well?

Apparently, the Keynesian model (and I don't have an econ background so playing catchup and learning a lot here) is dominant and isn't going away.  But why is the model always "trickle" down.

Paul Krugman's article today appears to be the first thing, more or less, he's sort of addressed to those of us who feel deficits/debt do matter... and that they matter because having our taxes go to debt on money borrowed is a squandering, a theft, and lost opportunity.. and because we're all taxed quite enough.

I mean, I feel like I can understand this, and in all seriousness... I think it's just bullshit.  Circular reasoning itself based on the unargued assumption that what *may* have worked in the 30s can be 'calqued' onto current circumstances.

No scientist would think this way.   So - how on earth is economics a science, and, if it isn't... why do they get so much power over our economy and our lives?

p.s. for what little its worth, I'd love to see a bunch of you guys who do have the proper econ background to post on his blog.  Seems to be a very important, if basic discussion.




Wilcat Dafoe's picture

...for the more "philosophical" amongst you:

As someone who actually studied philosophy undergrad, I'm pretty sure that what this guy is saying is, if you don't agree with Krugman/Democrats - it's because you've been fooled by language.

And that's doubleplusungood.


LawsofPhysics's picture

It isn't a science, it's a CON.  The reason why the financiers don't want to give out numerous micro loans is because they would lose control of velocity in an instant as all these small businesses scramble to buy up real inputs for their businesses.  The CON is coming to an end, so is the dollar.

Archetype's picture

German DAX just keeps climbing higher despite the ever increasing strength in EURO. How long until the ECB are lowering rates? Total madness. This is going to be a very hard punch in the European balls in the next earnings-period.