ECB Rescues European Market, After It Buys Italian Bonds For Fourth Day In A Row

Tyler Durden's picture

Following a report overnight from the WSJ that S&P would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession, which many economists say is likely, the entire overnight session was dominated by yet another period of fear and loathing out of Europe, further pressured by escalating uncertainty over EU summit after another meeting is called for Oct. 26. The headline scanning brigade will focus on Belgium where at 2 pm local time EU finance ministers will meet in to hammer out groundwork for the Oct. 23 EU summit. The result of concerns that absolutely nothing is resolved led to spreads for everything blowing out: at one point, France 10-yr Yield was up +6 bps to 3.21% (the widest spread over bunds at 119.01 since 1992), Italy 10-yr yield rose +3 bps to 6.05%, highest since Aug. 5, and the spread over bunds widens to euro-era record of 402 bps or most since 1996 and lastly the 10-yr Spain spread over bunds was +4 bps wider to 5.57%, with the Bund spread at 355, just tight of the August record of 398 bps. Still this was enough for the ECB to intervene and as the chart below shows, to purchase Italian BTPs en masse for the fourth day in a row, this time with a sizable amount, even as it is now confirmed that ECB interventions hav a several hour half life. And since the EURUSD and thus futures are now driven off the BTP price, everything rose when at 4 am Eastern the ECB began its daily intervention. Alas, at this point even 8 year olds realize that these are short-term liquidity measures while the long-term solvency problem is merely getting worse.

Below are the 4 ECB interventions sketched out:

And here is resumption in the surge of ECB deposits, which at the current rate of bank withdrawal from the market post the last MRO reset, will see the 2011 high taken out very shortly. No need to note that 3M USD Libor is now wider for the 50 something day in a row.

Lastly, here is the WSJ article that the market is now blissfully ignoring in hopes the ECB will always come to the rescue.

Bank ratings in the region would also take a hit under the two possible scenarios analyzed in the S&P report. "These stress scenarios are not our central expectation, but a simulation of the possible outcomes if such hypothetical events were to occur," the ratings company said.


"Although our scenarios take into account various debatable assumptions, we believe that they illustrate the likely general direction under given conditions," it added.


The prospect of Europe falling back into recession has increased amid the recent tumult of dismal economic data. A preliminary survey of purchasing managers in the 17-nation euro zone fell into contraction in September, meaning the private sector posted less activity last month than in August. It was the first monthly decline in activity since the euro zone climbed out of recession in the third quarter of 2009.


S&P analyzed the outcomes of two possible scenarios: a double-dip recession within the next four years, and recession coupled with rising borrowing costs for companies.


The second scenario didn't include governments or banks, as "we consider that support mechanisms from the EU and the IMF would keep borrowing costs low for sovereigns in difficulty, and we assume that the European Central Bank would provide effectively unlimited support to euro zone banks during 2011-2014," it said.


A recession alone would be enough to knock down the ratings of the five countries by one or two notches, as ballooning budget deficits and bank recapitalization costs would send government borrowing "significantly higher." The current EU and IMF funding mechanisms are sufficient to support borrowing requirements of Greece, Ireland and Portugal, and a "small sliver" for those of Italy and Spain.


"This safety net, however, would be insufficient if conditions were to deteriorate along the lines indicated in our stress scenarios, prompting a higher level of support for Italy and Spain," S&P said.

As a reminder, Goldman has already called for a "mild" recession in France and Germany. And should France be downgraded, which it will, Europe's fate is sealed.

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pendragon's picture

wonder if trichet is happy that ecb money is pumping anglo saxon stockmarkets.

Lord Welligton's picture

He retires on 31st October.

At this stage I'd say he's de-mob happy.

pendragon's picture

they should apply clawbacks to his btp trading losses

Ghordius's picture

I know this is not a popular opinion here, still:

he is doing his job - I would do the same

pendragon's picture

there is the honorable thing. look at stark and weber

Ghordius's picture

I don't disagree - but going strict was *not* an option - not when the UK and the US go in the full other direction

and what is your opinion on weber joining UBS?

pendragon's picture

good for him, he is a free agent. he might of made a career out of being wrong but at least he has principles...

Ghordius's picture

ok, agree

could you imagine how the MSM would have reacted to an ECB driving according to those principles? LOL

firstdivision's picture

Going strict is a possibility, when one wants to win the game. 

Ghordius's picture

but then you have to swim against the current - hard

in Switzerland, for example, business was going apeshit until the SNB set the floor - last week visited Zurich and wondered about how many Euro signs were in the shops, and everywhere you could buy with Euros for Euro-import prices.

Ghordius's picture

After nearly two years of reading ZeroHedge, I still have a problem with the bombastic style... "Europe's fate is sealed", for example... 8-)

Like Germany's fate in 1919? Or 1945?

Italy 10-yr yield at 6.05%? I expect this kind of yields will be soon seen as "normal"...


I might be too old or stupid for this, but I still don't buy this "EURUSD and thus futures are now driven off the BTP price" stuff. You write this as if the bulk of BTP would be in the hands of US/UK investors, they are not, it's nearly all in the hands of investors and banks in Italy and France. Why should the frigging EURUSD be affected that much? Has trade stopped being any reason for currency pairs? It's really only finance? Or is it a finance's way of looking through a distorted glass?

The US Markets reacts every time something sounds like a "resolution" by jumping up - ZH, is this causation or correlation? For people not trusting too much the models it still looks like "animal spirit" trying to find a reason to be very bullish (not that they have a reason to).

There is really too much "EuroZone effect" in the media for me to believe it.

pendragon's picture

just pull up a tick chart of eurusd and the same for btps. it is not rocket science

Ghordius's picture


again: causation or correlation?

Tyler blames often the bots. But again - for the stupid me - why should a frigging huge currency pair like the EURUSD be that much under the spell of the btps? Is the yield on the btps really the driver or just the tail?

pendragon's picture

would not an italian debt implosion be negative for eurusd? clearly at theses yield levels debt burdens become less sustainable particularly when you're already insolvent

Ghordius's picture

an italian debt implosion (something I was expecting would happen some day since 1983) would still take a long, long while. Look how long it is taking for Greece to go bankrupt.

the EURUSD would normally reflect the rate between the full exchange of all goods and services (+financials, ok) between the EuroZone and the DollarZone. It's an awful big dog and an awful small tail here.

pendragon's picture

i disagree. look where greek yields were 12 months ago. the european bond vigilantes have awoken. prepare for it to go parabolic

LawsofPhysics's picture

Fine, but answer the fucking question.  How "parabolic" does it have to go before you get default, implosion of the euro, WWIII, or some combination of the three.  It seems that, once again, manipulated markets can remain solvent much longer than you.  Agent has been waiting a long time.

pendragon's picture

well greece is a small fish but even a small fish is big enough to take out the 2 biggest french banks so the powers that be are not letting go (yet). if you're short the euro i feel your has been THE most frustrating month

Ghordius's picture

I'm hedged - have to

small fish? yes, but a bonanza for "speculation"

look, perhaps I'm too ignorant, but (as I have just written in another trail) as a thought: should California defaults, what would be the effect on the EURUSD? IMO=zero. Most people would, I presume, first sell in a small panic (no idea in which direction) and then go back. Am I wrong?

pendragon's picture

yes i believe you are incorrect. eurusd is a proxy for risk assets generally. look at the correlation with es for example. if something that is bad for equities like a california default occurs risk assets generally will suffer. USD tends to be safe haven in most risk off periods. if you have use of a bloomberg terminal do some historic regression between the euro and spx.

Ghordius's picture

thanks, pendragon :-)

if I understand it correctly for most "of the trade" correlation is all it needs - this ties with Tyler's theories of the bots. they are programmed by people that don't care about causation or long-term, only about getting an edge on the next few trading moments - makes money, of course

this means that whatever looked like correlation in the past will be treated as correlation in the future, both by humans with bloomberg terminal and bots - until it breaks?

what I find interesting is how this is being used in an environment which, IMO, is now different in many degrees

I start to think that Taleb is truly a fucking genius

pendragon's picture

yes as it surely will break. in the mean time it's correlation all the way.

Ghordius's picture


please, be corteous, even in disagreement

- Bond Vigilantes in Europe: I'm not sure if we will have to grow some or that the MegaBanks and the HomeShorters will take care. I remember having Italian Bonds in 1983 that had a nominal yield of over 16% and no bust followed (one reason why ES is BS for me). Of course, it was the Italian Lira and some devaluation followed, but not that much.

- I agree with LawsofPhysics: how long? how much? An associate of mine made a lot of money with Greek Bonds in the first part of the drama. Not by shorting.

- The Buono del Tesoro Poliennale was *boring* for anybody except Italians and French until the crisis started and frankly, the fact that the Bund auctions are not working well is much, much scarier for me. I wrote - I believe last year - in ZH that as long the French Banks (the Maginot Line) are not forced to sell the stupid stuff nothing will happen. The Italian public? Compare with the Japanese - are they selling their beloved bonds?

agent default's picture

Greece is small enough to put on life support and play extend and pretend to perpetuity.  Italy isn't.

Belarus's picture

Ghordius, pull up a chart, son? Just look at the EUR/USD and the S + P 500 over the last three weeks, and there you will have your answer, which you'll find yourself to be very wrong and ZH very right. 

For people not trusting too much the models it still looks like "animal spirit" trying to find a reason to be very bullish (not that they have a reason to)

Animal spirits? You're just not paying attention: the near record NYSE short interest has been cedeing during this melt-up, which is clearly short covering rally, as the machnes turn the market loose with the EUR/USD. Never underestimate the power of the machines: the force is with them for now. LOL. Also, perhaps you missed the eight straight weeks of mutual fund outflows, which is more like a rabbits running from the coyotes. 

HITMAN56's picture

just let it go already...getting bored here

achmachat's picture

i am honestly wondering how many times this can happen! One more time and there is no credibility left whatsoever.

ZippyDooDah's picture

Most soap operas have a longer run than expected.  And Europe is certainly a soap opera, though the story line is annoying.  I recommend large amounts of alcohol, so you can sit back and "enjoy" the show.

Mike2756's picture

I agree, this is their last chance to get it right.

daily bread's picture

How many times? Until  the world has exhuasted the set of people who have money to burn.

Gief Gold Plox's picture

"...we assume that the European Central Bank would provide effectively unlimited support..."

We're saved! ... erm, hand on?! Doesn't that assumption alone convey the EU is beyond help?

Irish66's picture

Didn't McGraw miss their earnings?

aleph0's picture

Honest question : who actually pays the Rating Agencies for the Analysis on Sovereigns , the banks ?

If so, wouldn't a "disclosure" be in order ? 

GeneMarchbanks's picture

Interventions are going to be the new normal until one day they aren't. Unintended consequences of this are yet to be seen. I can't imagine there is any confidence left in the Euro project.

Nate H's picture

How do you know that was ECB?

Mike2756's picture

True, probably on top of some traders buying the trendline.

Instant Wealth's picture

Meanwhile in Germany, Commerzbank CEO demands Troika should tell Greece "Game over - no more aid packages" and let them DEFAULT.

BarryG's picture

Bank Of England head, Mervyn King, has warned Germany's trade policy is bankrupting europe....

Mark123's picture

This coming from a guy who has printed British pounds and devalued their currency like there is no tomorrow.  Fat little weasel.

Dick Darlington's picture


Hahahaa, welcome back to Twilightzone

El Gordo's picture

How many more times can this happen? - A:  As many times as needed until the people wake up and discover their life's work is missing and their honor and dignity has been destroyed.  Looks to me like there's a few more to go before that happens.

Mike2756's picture

I think they burned through their "few more" this week.

Dick Darlington's picture


abugarance's picture

guys, anyone trading FX? have you seen the move in GBPUSD? 82 pips in one single 30 min bar???? I dont think what is driving these moves has anything to do with Italian bond buying but clearly option expiry. Nothing else explains those sort of moves

eurusdog's picture

I would agree, but you cannot fight this trend right now. I am short EURUSD from higher levels, but this trend clearly favors the European and Asian notes.

Belarus's picture

las, at this point even 8 year olds realize that these are short-term liquidity measures while the long-term solvency problem is merely getting worse...

Computers don't think; they are just programmed. Hell, I should train my brain to work this way. I've given up huge gains because I refuse to do anything at this point before I know the size and scope of the package next week. My worst fear at this point, which will surely come to fruition: that instead of the markets melting down, the can is kicked long enough where I'll be worried evermore, every single fuckng day. Sigh.

Gief Gold Plox's picture

Given how the situation has (NOT) been dealth with thus far, I sir, fully subscribe to your forecast.

whirlybird rules's picture

The European elite - that have run the continent for the last 300 years - still don't get it.  Their heads are so far up... the clouds ;), they still believe their populations will roll over and accept a miserable fate. Support from the PBOC and the US is also making it possible.  Does anyone believe that US business wants to see that USD rally???? 

Belarus's picture

Does anyone believe that US business wants to see that USD rally???? 

I remember 300 billion in QE going to EU banks. To your answer, hell no. 

eurusdog's picture

It is getting less and less important what the USD does because we are actually making less and less.