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European Interbank Liquidity Deterioration Spikes Despite Surge In Italian Bonds

Tyler Durden's picture


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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Mon, 12/05/2011 - 08:39 | 1946160 achmachat
achmachat's picture

what do you mean? you can't negociate math?

Mon, 12/05/2011 - 08:46 | 1946167 Chris Jusset
Chris Jusset's picture

Relax, Merkel and Sarkozy are on top of this latest crisis ...

Mon, 12/05/2011 - 08:54 | 1946176 WaspMK
WaspMK's picture

The Clowns are IN...

Mon, 12/05/2011 - 09:56 | 1946253 Elwood P Suggins
Elwood P Suggins's picture

Which one is on top?

Mon, 12/05/2011 - 08:46 | 1946168 scatterbrains
scatterbrains's picture

Would be nice if one of the contributors with access could post up a equity index overlay onto this chart to get a sense of the correlation.  When I tried it, the previous too bulges produced very sharp equity down turns leading to QE printing and  equity moon shots.

I'm thinking the top in SPY is in for the week in the 1st hour of trade this morning.

Mon, 12/05/2011 - 08:49 | 1946172 knight99
knight99's picture

Does anyone on ZH know the best way to short Italy/Spain 10 yr bonds? I would appreciate the help.



Mon, 12/05/2011 - 08:58 | 1946181 Sudden Debt
Sudden Debt's picture

Just short Italian banks.


Mon, 12/05/2011 - 09:04 | 1946189 Ghordius
Ghordius's picture

which could be nationalized - does it work then?

Mon, 12/05/2011 - 09:42 | 1946231 Sudden Debt
Sudden Debt's picture

Yep, I did it with Fortis in 2008 and when the bank went nearly to 1 euro I cashed out. I wasn't even a problem that it was forbidden to short them :)


Mon, 12/05/2011 - 08:56 | 1946171 Ghordius
Ghordius's picture

I have a prediction: If Italy can muddle through until January, the Italian Problem is postponed for at least six months.


Math? Sovereign Debt in Europe looked as bad or worse in the 70's. Where was math then? It's not about sovereign debt, it's about the big banks.

Why do you think the EuroDollar rates have been slashed so much? It's to make sure the big EU banks don't firesale USD denominated assets. Interbank loans in USD from US banks to EU banks have decreased to half (47%), for criminy...

Mon, 12/05/2011 - 09:19 | 1946192 i-dog
i-dog's picture

*boot*!! ... another can kicked to summer! Playing politics is e-a-s-y!

Mon, 12/05/2011 - 08:50 | 1946174 Ancona
Ancona's picture

Quick, turn on the Bat Signal!

Mon, 12/05/2011 - 08:54 | 1946177 Ghordius
Ghordius's picture

and who answers the call? Batman (the FED) or Robin (the ECB)?

Mon, 12/05/2011 - 08:57 | 1946180 Sudden Debt
Sudden Debt's picture

Not just yet... Batgirl (Merkel) has her period so nobody leaves the cave.

Mon, 12/05/2011 - 09:02 | 1946186 Ghordius
Ghordius's picture

SD, you look delicious, as always.

No BatGirl is the Bank of England. Wait and you'll see her soon in overdrive action.

It will be so sexy that you will take your silver stash to bed.

Mon, 12/05/2011 - 09:07 | 1946193 Sudden Debt
Sudden Debt's picture

I thought it was Albert who was England... :)

Mon, 12/05/2011 - 09:23 | 1946208 sabra1
sabra1's picture

at her age, all you get are clots!

Mon, 12/05/2011 - 08:56 | 1946179 Sudden Debt
Sudden Debt's picture

This is 2008 ALL OVER AGAIN!

First we go crazy up for a few weeks and than BAM BITCH! BAM! DOWN YOU GO!


Mon, 12/05/2011 - 09:13 | 1946183 Dick Darlington
Dick Darlington's picture

Spain November Services PMI Falls to 36.8 from 41.8, Markit Says




DEEP recession coming in southern Europe so equities firmly in green.


Mon, 12/05/2011 - 09:03 | 1946188 writingsonthewall
writingsonthewall's picture

“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,”


Totally dellusional - or addicted gamblers - which is it?


This week cannot end well - unless there is a full fiscal union announcement by Friday (and that means all EU members in - without voting on referendums) - then it's over.


The problem is I can't see all these EU leaders telling their countrymen that from now on they will have their budgets signed off by Berlin at the end of this week.


Referendums or riots is how this story will end itself.

Mon, 12/05/2011 - 09:10 | 1946197 Sudden Debt
Sudden Debt's picture

I'm pretty sure that even in Auschwitz there where guys who where standing in the showers who said: "I bet we'll get got water, this will be so much fun!"

and than the gold went to Switzerland....



Mon, 12/05/2011 - 09:06 | 1946191 Sudden Debt
Sudden Debt's picture
Looks like the Eurozone Manufacturing PMI isn't good at math either...


Mon, 12/05/2011 - 09:07 | 1946194 Josephine29
Josephine29's picture

Also the situation in Spain's actual economy as opposed to government forecasts is going from bad to worse.

"A shocker for Spain in those numbers

Spain’s reading on this number was 38.2 which is on a scale where a number below 50 indicates contraction. Whilst this is only one number and it is a sign of the times that PMI numbers are attracting attention but it is hard to avoid the thought that these are the sort of numbers seen in Greece. Remember also that her retail sales fell by 7% in October."

Mon, 12/05/2011 - 09:23 | 1946209 Eally Ucked
Eally Ucked's picture

No jobs, no benefits so where the money supposed to come from? Just wait for others to implement austerity packages in their services economies.

Mon, 12/05/2011 - 09:07 | 1946195 Rip van Wrinkle
Rip van Wrinkle's picture

DEEP recession coming in southern Europe = Mass Civil Disorder

Mon, 12/05/2011 - 10:08 | 1946276 willien1derland
willien1derland's picture

Great point RVP - not to mention the required austerity which must be introduced to ensure Spain maintains the Debt/GDP target! To speak to the MATH component as denominator approaches zero the numerator must deteriorate with the identical if not greater rate of change to maintain the ratio - unfortunately if the denominator goes negative - the choice is 1) the dreaded divide by zero error OR 2) cook the books to overstate GDP...which one will be chosen?

Mon, 12/05/2011 - 10:19 | 1946335 Peter K
Peter K's picture

To speak to the MATH component as denominator approaches zero the numerator must deteriorate with the identical if not greater rate of change to maintain the ratio - unfortunately if the denominator goes negative -...

You must be doing European math. :)

Mon, 12/05/2011 - 09:26 | 1946214 Tense INDIAN
Tense INDIAN's picture

i see nifty going down again ....and so the other markets should also follow:::


the next fall may not be BIG though...timewise ...till this friday ..and then the next week we will rally and the ECB summit on 9th will be told as the reason for it....

Mon, 12/05/2011 - 10:15 | 1946325 rambler6421
rambler6421's picture

Mkt manipulation bitchez!

Mon, 12/05/2011 - 10:20 | 1946338 Shizzmoney
Shizzmoney's picture

"Math is stupid" - Timothy Geithner

Mon, 12/05/2011 - 11:30 | 1946596 asteroids
asteroids's picture

Too much debt and credit and not enough dollars and an asteroid full of CDS's ready to crash on your head. Boom!

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