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Europe's €1.7 Trillion Maturity Cliff In A Declining Excess Liquidity Context

Tyler Durden's picture





 

While today's lower than expected LTRO repayment news was largely a strawman set by misguided expectations set under the impression that Europe is fixed (it isn't), and that the ECB is willing to witdraw excess liquidity (it isn't as the result was a spike in the EURUSD so high it got quite a few political officials talking the EUR down to prevent an export-sector crunch), there is a bigger issue facing Europe in the context of liquidity, and that is a maturity cliff of some €1.7 trillion over the next 3 years.

As the chart below from Goldman shows, the excess LTRO cash remaining after today is a modest €807 billion, meaning that not even half the required prepayment capital can be funded outright. It is even worse when calculating the closed European Excess System cash in the second chart below, which also according to Goldman has declined to just under €400 billion. This means that while rolling the maturing debt is certainly an option, the incremental pick up in interest rates will mean far more cash leaves Europe's banks, which at a time when virtually not a single European bank can generate any positive cash from operations bank liquidity shortages will once again return.

A bigger issue is what happens if the credit market shock of 2010 or 2011 or 2012, comes back and makes any rolling of debt if not impossible, then certainly unfeasible at realistic rates (especially now that the CDS market has been crippled for good as a hedge to long risk positions). In that case it will be up to the ECB to once more step up, and fill in the "maturity cliff" gap which is anywhere between €900 billion and €1.3 trillion. Unless, of course, the bank bailout provisions of the ESM are finally activated.

In either case, this goes directly to all short-sighted assumptions, that the ECB is willingly contracting its balance sheet: the last thing the central bank wants is to be seen as collapsing liquidity at a time when the debt prepayment calendar surges. Of course, there is one simple way to offset all such popular delusions: namely to force its balance sheet to soar again, which can be achieved in one of two ways - i) much more Long-Term (and other market) refinancing operations, or ii) outright sovereign bond monetization over Germany's screaming activist corpse.

And just as obvious is that both of those steps would require the creation of a controlled crisis, which will then most certainly not be allowed to go to waste.

 


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Fri, 02/22/2013 - 13:09 | Link to Comment derek_vineyard
derek_vineyard's picture

blah blah blah.......talking heads and analysis mean nothing.......this party is still raging!!!!!!!!

Fri, 02/22/2013 - 14:58 | Link to Comment ArkansasAngie
ArkansasAngie's picture

So ... In other words the European banks are actually insolvent and its liquidity issue after all.
Bankruptcy is such a bitch

Fri, 02/22/2013 - 13:25 | Link to Comment EscapeKey
EscapeKey's picture

mystery buyers will show up

Fri, 02/22/2013 - 14:00 | Link to Comment Peter K
Peter K's picture

Why would the ECB need to expand their balance sheet when the Fed is more than happy to expand theirs and allow the excess leeequeeeeedeeeeteeeee can help the Euro brothers out?

Fri, 02/22/2013 - 14:05 | Link to Comment rlouis
rlouis's picture

u.s. fed electrons are cheap and fre'

Fri, 02/22/2013 - 14:21 | Link to Comment ekm
ekm's picture

There's one thing that baffles me.

 

If europeans want foreigners to buy their ESM bonds or any euro bonds, that would mean that the demand for euros will be increased, because euros are required to buy euro bonds, hence:

 

 1) Euro bond purchase = very strong euro

 2) Very strong euro = no exports for germany

 

I am not really sure those guys know what they want.

Fri, 02/22/2013 - 15:53 | Link to Comment HoaX
HoaX's picture

You seem to misunderstand how the German industry actually functions.

Germany has very few natural resources, hence the need to import most raw materials for what they produce. A stronger Euro makes those imports cheaper, and won´t affect their European export base too much.

Besides that they export mainly high quality goods which are less susceptible to interest rate fluctuations than cheap consumer goods.

Fri, 02/22/2013 - 14:46 | Link to Comment web bot
web bot's picture

I'm not as smart as these guys at the Squid, so in plain English: with rising interest rates, cash crunch follows... inflation... all ZHers understand this.

Fri, 02/22/2013 - 18:53 | Link to Comment Herdee
Herdee's picture

I'd be very concerned in Europe about the day that the FED is forced to "get up and out of the basement."That event will come,and interest rates are going to go in one direction and that's up.

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