European Interbank Liquidity Deterioration Spikes Despite Surge In Italian Bonds
Even as Italian bonds surged on hopes that the $40 billion Italian austerity plan (putting this to scale, $400 billion in Italian debt has to be refinanced in the next 12 months) proposed by Monti which is supposed to lower the nation's debt load (putting this to scale, Italy has €1.9 trillion in debt), coupled with expectations that this time (we lost track of which one this actually is) the European summit on December 9 will actually achieve something, the liquidity situation, and not just any liquidity but EUR-funded liquidity (the one that the Fed can do nothing to help by lowering the OIS swap rate) deteriorated massively overnight, as European banks deposited a whopping €20 billion in additional cash with the ECB despite the coordinate central bank intervention yesterday. Total deposits are now at €333 billion, just €50 billion short of the all time high hit in June 2010 when Greece failed for the first time and there was no clarity that the Bernanke Put had gone global, implying the need for an eventual Mars bail out. And confirming that the liquidity crunch is now shifting to the local currency, another €7 billion was borrowed from the punitive Marginal Lending Facility. So now what we have is a liquidity crisis that has been confirmed to not be only USD-based but also EUR. Congratulations Fed. Yet since the market is slow in understanding complex things it is surging, as it looks at Italian bonds which as noted earlier are soaring on nothing but hope, it will take a little before this filters to all the right places.
So while that takes cares of the ugly stuff, as for explaining the giddiness in the European market, here it is from Bloomberg/BusinessWeek which it appears is far less cynical.
Italian bonds rose, pushing the 10- year yield down by the most in almost four months, after Prime Minister Mario Monti announced 30 billion euros ($40 billion) of austerity and growth measures to lower the nation’s debt load.
Spanish 10-year bonds climbed for a sixth day before German Chancellor Angela Merkel and French President Nicolas Sarkozy meet to discuss the region’s deficit rules ahead of a Dec. 9 European leaders’ summit. German yields rose for the first time in four days as European stocks advanced, sapping demand for the nation’s bonds. Germany sold 2.675 billion euros of six-month bills to yield 0.0005 percent today, while France and the Netherlands will also auction short-maturity debt.
“The market is betting a lot on a positive outcome at the end of the week after the leaders’ summit and that’s supporting peripheral bonds,” said Gianluca Ziglio, a London-based interest-rate strategist at UBS AG. “The Italian budget measures seem to go in the right direction, especially in terms of the size.”
The yield on 10-year Italian bonds fell 50 basis points, or 0.50 percentage point, to 6.18 percent at 10:28 a.m. London time. That’s the biggest drop since Aug. 8. The 4.75 percent securities maturing in September 2021 rose 3.225, or 32.25 euros per 1,000-euro face amount, to 90.25. The rate on Italy’s two- year notes fell 93 basis points to 5.64 percent.
Italian 10-year rates dropped 58 basis points last week, the first weekly decline since the five days ending Oct. 7, as optimism that France and Germany are aligned on measures to stem the euro-area debt crisis boosted demand for higher-yielding assets.
European Central Bank President Mario Draghi signaled on Dec. 1 the central bank may do more to fight the crisis as long as governments push the euro area toward a fiscal union.
Italy’s cabinet approved Monti’s austerity package yesterday, and the Prime Minister is due to present the plan to the legislature today, while parliament may vote on it by Christmas. The premier is seeking to cut the euro area’s second- biggest debt load and regain investor confidence after Italian borrowing costs exceeded the 7 percent threshold that led Greece, Ireland and Portugal to seek aid.
Here is the translation: any interim improvement in financial conditions, any hope that the ECB will increase SMP purchases are paradoxically counterproductive, as only the outright monetization (with or without a fiscal union) of debt by Draghi has any hope of helping Europe roll the trillions in debt over the next 2 years. And as the market comprehends this, we fully expect the down leg to return with a vengeance as the cat is now out of the bag. Of course, it wouldn't be a bear market if it did not have such interim rallies on the way down: after all shorts have to reload.
In the meantime, no matter how hard it tries, Europe still have one simple measure to deal with, which unfortunately no matter how hard it tries, it simply can't resolve: math.
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