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ECB Preparing To Close Liquidity Spigot?

Tyler Durden's picture


With the hopes and dreams of every long-only manager and beta-chaser now resting on the broad shoulders of nominal-wealth-creators at the European Central Bank and its LTRO 2 offering, today's news from Reuters that 'powerful members of the ECB's council are privately hoping demand will fall well short of the EUR1tn that many expect' confirms their hope that it will be the last. Critically, as we have discussed before, markets are becoming used to the pump and will expect endless LTRO (especially given the moves in bank stock prices - while credit has underperformed significantly in the last week or two) and central bank sources tell Reuters 'they are worried that banks will become too reliant on ECB funds'. This is exactly the unintended consequence we warned about as the banks will become less incentivized to lend and create credit to drive the real economy (even as the nominal economy - or equity market) surges. The implicitly hawkish stance increasingly being taken by the ECB as Weidmann warns of the 'too generous' supply of cheap/free-money should prompt concerns that the ECB will close the liquidity spigot sooner than consensus hopes and as is evident from last April/May's tightening and the exuberant expectations priced into stocks for more printing, perhaps credit's recent weakness signals that asset prices are overdone here (especially as there is no sign of credit creation in the real economy and ECB reserves continue to rise).


The last time the ECB began to tighten, stocks dropped dramatically...

but the growth of the ECB balance sheet has driven stocks in Europe much more directly.

Two things of note in this chart:

1) The plunge in stocks as the US was downgraded and European chaos increased was too large for even the ECB's balance sheet growth to stop (this is noteworthy as sometimes the Central Bank Put just isn't struck at the right level or simply has too little delta) - even though the expansion off the lows did indeed prime the pump for stability and then as we were told of LTRO 1, markets accelerated to that new expectation; and


2) The last month or two (post LTRO1) as the ECB balance sheet has slowly leaked lower was ignored by the equity market (orange oval) as expectations of LTRO 2 were increasingly priced in.

Given the expectations priced into stocks (and remember credit has rallied but has recently started to weaken notably), any more hints by the ECB that LTRO 2 will be the last and that the liquidity spout is being shut down for now - leaving governments more responsible for growth - will not be taken well by the market.

As an aside, regarding the LTRO and its 'flaw' that we have discussed at length, perhaps today's increasing stigma (lower pane) once again stymies some demand from 'good' banks for ECB funds. We continue to track this 'stigma' trade for insight into LTRO 2 size expectations. 

Insight: ECB preparing to close liquidity floodgates

The European Central Bank wants its second offer of cheap ultra-long funds next week to be its last, putting the onus back on governments to secure the euro zone's longer-term future.


Powerful members of the central bank's 23-man governing council are privately hoping demand at the February 29 auction will fall well short of the 1 trillion euros some expect, backing their view that it should be the last.


Central bank sources say they are worried that banks will become too reliant on ECB funds, removing the incentive to restart lending between themselves.




ECB officials accept they have to help the banking sector but they also want to send a message that the unprecedented liquidity provision will end.


Bundesbank chief Jens Weidmann has warned that "too generous" supply of liquidity could create risky incentives for banks, which could in turn store up future inflation risks.


Bank of Finland chief Erkki Liikanen is also worried about ample liquidity provision leading to future problems and has said the ECB must think about how to unwind the extraordinary measures. Other senior policymakers are concerned too.




The ECB is also concerned the interbank market is not yet functioning fully. Bankers themselves see this concern.


"If you are flooding the market with cheap refinancing then there comes a point when you are preventing the market from working because nobody is going to borrow from another bank at X percent if they can borrow from the ECB at Y percent," said a senior banker at a leading global bank.


The ECB expects governments to take responsibility for banks that prove too weak to help with extra liquidity and believes states should step in if, in three years when the funding term comes to an end, they are incapable of repaying the credit.




This may come as something of a shock to some banks and officials. One senior EU official said he had expected the ECB would offer banks a third round of long-term funding.


"We expected a third," he said. "They (ECB) have always said they will keep an eye on how the market is evolving. My guess is that they are hedging their bets."

Charts: Bloomberg

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Tue, 02/21/2012 - 12:10 | 2181060 LawsofPhysics
LawsofPhysics's picture

Right, they are going to "tighten".  LOL, fine, I dare them to tighten.  ZIRP is QE buy any other name.  What is the short volume again?

Tue, 02/21/2012 - 12:17 | 2181085 resurger
resurger's picture

Robo still active? Or the sideliners stepped in?

Tue, 02/21/2012 - 12:24 | 2181120 The Big Ching-aso
The Big Ching-aso's picture



I think spigot is the wrong word.   More like sewer pipe.

Tue, 02/21/2012 - 12:36 | 2181181 Harlequin001
Harlequin001's picture

It means gold is about to shoot, and they know it...

Tue, 02/21/2012 - 12:54 | 2181271 Ghordius
Ghordius's picture


"The ECB expects governments to take responsibility for banks that prove too weak to help with extra liquidity and believes states should step in if, in three years when the funding term comes to an end, they are incapable of repaying the credit."

oh, he really is a sonofabitch, but he is smart, our sonofabitch Draghi. I am starting to like him...

so the ECB is not the lender of last resort, it's only the provisional lender of last resort and all the european parties can just start to put their thinking caps on about what to do with the banks (obvious: nationalize) after the next election rounds...

Tue, 02/21/2012 - 15:19 | 2181717 Mountainview
Mountainview's picture

The Sovietunion of Europe, planned and managed out of Brussels steps closer to realization every day!

Tue, 02/21/2012 - 15:28 | 2181761 Ghordius
Ghordius's picture

blablabla, have you ever been in the Sovjet Union. well, I have and I might just notice a slight difference

Tue, 02/21/2012 - 16:50 | 2182129 Mountainview
Mountainview's picture

Athens these days goes the way .. Wait for the next elections ( in Greece )...

Tue, 02/21/2012 - 13:20 | 2181364 DeadFred
DeadFred's picture

Yet another boat load of US Treasuries hit the block on Thursday after the long list of Fed Hawks give their spiels on reining things in so the bond traders once again think their products are going to retain their value. Expect a lot of Hawk-Talk near term watch what comes afterward. Also watch to see if gold and silver finally break through resistance. Ultimately they will but will it be on this trip up??? 

Tue, 02/21/2012 - 12:35 | 2181170 reload
reload's picture

Exactly - just posturing in order to appear sensible while in fact continuing to pump and inflate worthless junk at full tilt. Short ammo needs to be kept dry for now.

Tue, 02/21/2012 - 13:44 | 2181440 JennaChick
JennaChick's picture

Bank of China cut boosts commodities: http://www.armadamarkets.com/2012/02/markets-on-20-feb/

Tue, 02/21/2012 - 17:32 | 2182336 TheFourthStooge-ing
TheFourthStooge-ing's picture

armadamarkets.com spammer boosts search engine pollution for his crappy site.

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Tue, 02/21/2012 - 12:11 | 2181061 oogs66
oogs66's picture

one more gasp higher to take the last shorts out, and then we can collapse?

Tue, 02/21/2012 - 12:46 | 2181235 dizzyfingers
dizzyfingers's picture



Let's hope so!

Tue, 02/21/2012 - 12:11 | 2181064 stopcpdotcom
stopcpdotcom's picture

My brain can't take much more of this.

Tue, 02/21/2012 - 12:12 | 2181069 dracos_ghost
dracos_ghost's picture

Translation: "Gee, we're worried that the junkies will become too dependent on our heroine and they might overdose. Maybe we should rethink our supply. Nah, pump 'em up."

Tue, 02/21/2012 - 12:15 | 2181077 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Get your DJ 13k hats here!  Also selling hopium!  Get you hats and hopium here!!

Tue, 02/21/2012 - 12:18 | 2181090 SillySalesmanQu...
SillySalesmanQuestion's picture

Whaaaaaat....no more free money for banks in Europe. That certainly won't be the case for the FED and their friends...

Tue, 02/21/2012 - 12:18 | 2181091 pods
pods's picture

Sure they can stop.  Any time they want.

I am sure if they turn off the printer everything in Euroland will be right as rain.


Tue, 02/21/2012 - 12:20 | 2181101 SeverinSlade
SeverinSlade's picture

Hopium withdrawals are a bitch.

That's also great news for the markets.  Yes, we have a new grand "deal" (which, as ZH has pointed out, is the same deal as July 2011).  This deal will surely fall apart within the coming days and weeks precisely as the ECB is signalling the end of LTRO.  Still likely Greek default + CDS triggers + no more LTRO = ...profit?

Tue, 02/21/2012 - 12:28 | 2181138 adr
adr's picture

And then Superben can fly in and throw his magic crystal into the heart of NYC creating the Fortress of Printitude.

Tue, 02/21/2012 - 12:23 | 2181112 Everybodys All ...
Everybodys All American's picture

and who buys all this burdensome debt then? The math bitch doesn't end well.

Tue, 02/21/2012 - 12:25 | 2181123 Zymurguy
Zymurguy's picture

Break out the Dow 13K Hats!!!!!!!!!

Tue, 02/21/2012 - 12:25 | 2181126 slewie the pi-rat
slewie the pi-rat's picture


they gonna stop pretending abc and start pretending abd

got it!

now they gonna pretend they can create credit to drive the REAL economy

what a complete fuking joke!

Tue, 02/21/2012 - 12:26 | 2181130 adr
adr's picture

So the market is going to pull a Whitney Houston???

All junkies die from the drugs they take. Hopium makes crack look like a Tootsie Roll.

Tue, 02/21/2012 - 12:28 | 2181135 Catullus
Catullus's picture

Priced for perfection. If they demand too much, there are still problems. If they demand too little, the spigot gets cut off. If they demand just enough, muddle through can continue. Who wouldn't want to be a bull right now?

Tue, 02/21/2012 - 12:28 | 2181136 JohnKozac
JohnKozac's picture



"...worried that banks will become too reliant on ECB funds"


I that a joke?

Tue, 02/21/2012 - 12:32 | 2181157 adr
adr's picture

No, notice they didn't say anything about becoming to reliant on FED funds.

Tue, 02/21/2012 - 12:28 | 2181139 The trend is yo...
The trend is your friend's picture



Banks : "Just one more hit i promise i won't ask for another"

Tue, 02/21/2012 - 12:31 | 2181148 adr
adr's picture

Anybody else want to start a class action lawsuit against Greece for mental pain and suffering??? We'll throw the ECB in there as well.

Tue, 02/21/2012 - 12:45 | 2181233 dizzyfingers
dizzyfingers's picture

adr: Greece isn't the problem dunce. Central banks are.

Tue, 02/21/2012 - 12:31 | 2181153 Convolved Man
Convolved Man's picture

Dammit Jim, I'm just a country bank, not a lender.


Tue, 02/21/2012 - 12:36 | 2181184 adr
adr's picture

we've pushed the printer passed it's limit captain, the cartridges are about to crack.

Dammit I need more money Scotty

Tue, 02/21/2012 - 12:52 | 2181263 Vince Clortho
Vince Clortho's picture



Take it up to Warp Speed, Scotty!

Tue, 02/21/2012 - 12:33 | 2181162 New American Re...
New American Revolution's picture

They can't stop now, and if they don't already know that (which is hard to believe), they'll understand it soon.   And if they don't, the market will.   The BIS and its members are now on a turbo-charged squirrel cage run and can't get off.   It will only end when the pivots and the wheel disintegrate from the heat and speed, and that ain't gonna be pretty.   It's called "Revolution", the bankruptcy of government.   If you'd like to know more, visit www.nar2012.com, for a clearer look through an opaque looking glass.   Serfs Up America!

Tue, 02/21/2012 - 12:44 | 2181228 dizzyfingers
dizzyfingers's picture

NAR: www.nar2012.com,

GREAT! Thanks.

Tue, 02/21/2012 - 12:35 | 2181171 zebrasquid
zebrasquid's picture

Price of Oil is about to be the thing that moves the stock market.

Here in San Diego, we all noticed a whole lot less traffic this weekend on the freeway, where normally the LA folks just joyride down here on such weekends.

Same thing happened back in '08 when gas hit $4.

A sign of tightening purse strings, not good for a consumer economy.

The market reminds me of Gingrich a month ago, before the reality check.

Tue, 02/21/2012 - 12:35 | 2181172 zebrasquid
zebrasquid's picture

Price of Oil is about to be the thing that moves the stock market.

Here in San Diego, we all noticed a whole lot less traffic this weekend on the freeway, where normally the LA folks just joyride down here on such weekends.

Same thing happened back in '08 when gas hit $4.

A sign of tightening purse strings, not good for a consumer economy.

The market reminds me of Gingrich a month ago, before the reality check.

Tue, 02/21/2012 - 12:40 | 2181195 dizzyfingers
dizzyfingers's picture

"powerful members of the ECB's council are privately hoping demand will fall well short of the EUR1tn that many expect' confirms their hope that it will be the last"

Finally,truth emerges.

ECB council actions or lack thereof, since every action they've taken have been, apparently, diametrically opposed to anything relating to reality that any dunderhead out here in realityland could have suggested and probably would have been right, have driven the world's economy and financial system into the sewer, and it all depended on "hope"? If that is so, THERE IS NO HOPE.

It's too late for hope. And there is no trust either, and won't be any.


Tue, 02/21/2012 - 12:41 | 2181209 Fastback
Fastback's picture

Forget about Zombie Banks of Japan. The Banks of the world are now one big Zombied Institution.

Tue, 02/21/2012 - 12:46 | 2181239 Alethiometer
Alethiometer's picture

I can't wait to see who collapses first!  Looked like it was going to be the U.S. for awhile there, but the EU got jealous and increased its efforts to implode!  Gonna be a photo finish! 

*Alethiometer likes to watch economic self-destruction whilst purched atop a mountain with an AK-47*

Tue, 02/21/2012 - 13:03 | 2181303 pods
pods's picture

Top of the mountain should be watched with a CheyTac Intervention.


With that you can REALLY reach out and touch someone!


Tue, 02/21/2012 - 13:10 | 2181333 Alethiometer
Alethiometer's picture

I prefer to let them come to me.  Save the bullets.

Tue, 02/21/2012 - 12:48 | 2181244 adr
adr's picture

The updates from my buyers are not good. The JC Penney experiment is wreaking havok in the retail world. The buyers have all been put on notice to gain concesions from vendors in order to lower retails. The big box stores are sure as hell not going to sacrifice margin.

With rising input costs, vendors can't lower wholesale prices without going tits up. Nearly all inventory in the pipeline has been purchased at higher cost, you can't change the price you paid after the fact.

The standoff has created a massive buildup in wholesale inventory. Buyers will not place orders so store inventory is falling, they need more product but are trying to let inventory build at vendors to the point they will need to unload at a lower price.

Big box stores are all going to start bypassing vendors and offer to license more brands. The end of Corporate Socialism is here, the start of Corpoate Facism has begun.

Tue, 02/21/2012 - 13:01 | 2181292 Alethiometer
Alethiometer's picture

I heard the FED is offering their own branded version of tennis shoes.  They will be called "Fiscal Easers" aimed at retirees and pensioners.  They will be used to walk down to their new jobs at Walmart and McDonalds instead of living off savings, since they will be worthless.

Look for Ben to be repping them at the next congressional hearing.

Tue, 02/21/2012 - 12:49 | 2181255 Dollar Bill Hiccup
Dollar Bill Hiccup's picture


Or THE WALL : "How can you have any PUDDING, if you don't eat your MEAT?"

Markets love to dream about endless extrapolation.

A break in the LTRO might be a pressure valve to let some steam escape.


Tue, 02/21/2012 - 13:14 | 2181345 PaperBear
PaperBear's picture

LTRO is just the latest addictive drug and now everyone cannot do without regular injections.

Tue, 02/21/2012 - 13:33 | 2181409 Curtis LeMay
Curtis LeMay's picture

There is nothing left in euroland to even put in the spigot.

Portugal Needs More Money To Stay Afloat



Tue, 02/21/2012 - 14:05 | 2181499 dcb
dcb's picture

we aren't at the line for tlt, one mor day up till profit taking and buy some short again until  time to go over once more.

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