This page has been archived and commenting is disabled.
On The Demise Of European Bank Debt
While the LTROs were supposed to bring European banks back from the edge of insolvency with a warming blast of liquidity, the sad truth, now that the exuberance of fresh money-printing has faded, is that the unintended consequence has crammed down the senior unsecured bank debt holders to the lowest of the low. This realization, that we have discussed a number of times - most recently here - that nothing has been solved - as the LTRO Stigma unintended consequence, is starting to leak back into broader risk premia as now the contagion risks are back on the table and even non-LTRO-facing banks are seeing spreads increase as expectations of either broader forced cram-downs or interconnected vicious cycles rear their ugly head once again among European banks - and implicitly back onto European Sovereign balance sheets. Citigroup's Hans Lorenzen highlights four key reasons for the increasingly binary bifurcation that senior unsecured bank debt has become.
Step 1: Vicious Cycles in Financial, Sovereign, and 'Real Economy' - briefly stymied by LTRO Hope but last week's macro data indicates the ongoing negative feedback loop between Austerity and Economic Contraction continues...
Source: Barclays
Step 2: LTRO fixed short-term liquidity issues in hopes of solving long-term insolvency issues but in the meantime the unitended consequence crammed down existing unsecured creditors...
Source: Citi
Step 3: But this has led to the LTRO Stigma as this cram-down and subordination was priced into LTRO-facing banks first (the LTRO Stigma that Draghi lied and said was not present) and now is creeping across into non-LTRO facingbanks as the vicious cycle from above starts to re-appear - as we also note the last week or so that short-term EUR-USD basis swaps have stabilized (stopped improving) and in fact 1Y basis swaps have started to deteriorate once again...
LTRO Stigma has exploded and non-LTRO banks are starting to creep wider too...
And perhaps more worryingly EUR-USD basis swaps are starting to creep weaker once again...
Chart: Bloomberg
Step 4: Leaving unsecured bank debt holders with a very binary payoff as the four realities of the new rules in Europe will surely leave non-government investors questioning the investment:
As a Bank bondholder:
- You now sit towards the bottom of the capital structure
- You're in a much thinner slice than you used to be
- The quality of your asset pool has deteriorated
- The correlation of your asset pool has risen sharply
Source: Citi
All-in-all - The LTRO stigma trade seems the best way to play and its becoming a major driver of equity performance as Italian banks hit YTD lows.
»
- 8812 reads
- Printer-friendly version
- Send to friend
- advertisements -
in the end we are all socialists
Running out of other people's money
yeah, other people's money is a problem, it wastes away so quickly...
damn those other people
"un intended consequence has crammed down the senior unsecured bank debt holders to the lowest of the low."
There! Fixed it for ya.
intended, forced, no other solutions, SHTF all could fit there
Nothing has been solved?
Isn't this why they meet/vote/negotiate/tell us over and over and over again its solved?
Can i run my fucking buisness this way, and get paid?
When does the revolution start again?
When the 1) margin calls are made and 2) supply line disruptions occur more frequently in the food and energy sector. Regarding food, remember a lot of farmers in the midwest just got "MF-globaled". Unintended consequences indeed.
A debt jubilee is coming, unfortunately it will be for the banks, not you. Oh yeah, and if you have any "deposits", they will be re-hypohticated to pay off the bank's debt.
"Depositors need to suffer their fair share of pain." -some UK Git
"Hey Draghi, Fuck You." -ZH philosopher
"And the seventh rule is....if this is your first night at Fight Club, you have to fight" - Tyler Durden.
That means you Draghi.
Where can i buy those "THERE IS NO STIGMA!!!" -t-shirts?
These bonds should now be priced close to preferreds
I knew LTRO was effectively a subordination, but this one of the more shocking charts I have ever seen! I didn't know it was so extreme. I have been preaching that part of the solution for Europe, was "having the banksters share in the loss". The shocker is that they already have, the LTRO insured that, as the caca collateral pledged to the ECB has badly subordinated the entire capital structure of the banks. The whole structure of European banking leaves the ECB (countries of Europe) holding the bag, along side the depositors. This is far beyond deep doo-doo and forces me to be even more bearish on resolution than my previous extreme bearish views. Turn out the lights.
Ltro has caused the money market funds unable to find investments.
http://www.cnhedge.com/
http://www.jinrongbaike.com/
In the European view, old money operates banks, who in turn leverage via wholesale banking to own strategic/aristrocratic chunks of a country's economy. That centuries old relationship is about to go up in smoke.
http://www.msnbc.msn.com/id/28368421/ns/business-us_business/t/suicide-madoff-investor-was-honorable-man/
Cue IMF to ride to the rescue.
http://www.whec.com/news/stories/S2565913.shtml?cat=10065