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How Much LTRO Dry Powder Is There, And Why Spain Is Again The Wildcard
Now that every morning the US market is once again in full on European debt issuance stress mode, it makes sense to see just when the real stress will hit the tape, or in other words, how long until the LTRO money fully runs out. Remember that the latest contraption in the European ponzi, the LTRO, took worthless collateral from European banks, and flooded them with fresh money good cash so they could use this cash to buy their own sovereign debt, and specifically to prefund the hundreds of billions in 2012 issuance net of debt maturities. So how does the math work out? Deutsche Bank summarizes the unpleasant picture.
Although exact figures are not yet available, we are able to deduce that from the two 3yr LTRO’s combined, Italian and Spanish banks would have had about €104bn and €54bn to utilise in carry trades (net of re-financing). Between Dec 2011 and Feb 2012, Italian banks purchased €43bn of domestic bonds and Spanish banks €61bn. We can see here that Italy still has €61bn of LTRO headroom left while Spain has already surpassed their allotment by about €7bn.
If we take these figures and compare them to the expected sovereign issuance over the rest of 2012, we start to gain a clear picture of potential pressures during the year. Spain has completed €40.5bn out of the estimated €86bn in issuances so far with €45bn expected in redemptions, leaving them essentially flat for the year. Italy on the other hand has completed €74bn out of the estimated €232bn in issuances so far with €128bn in expected redemptions, leaving a net issuance headroom of €30bn. Our rates guys therefore conclude, that in general, Italian banks are better situated to support their domestic bond market this year than the Spanish banks are.
So while both Spain and Italy are likely literally on the edge when it comes to net issuance and demand dry powder, there is one very big risk:
Clearly one risk is that non-domestic bank holdings decline further
offsetting any domestic bank buying. Interestingly the external holding
of government debt in Spain and Italy has declined to 30% and 37%
respectively. For both countries this was at 45% level in 2010.
Translated: selling. Indeed, if despite everything Europe has done, plain old vanilla selling resumes, the LTRO cash will go poof. Which brings us full circle: has the market regained faith and trust in the CDS market after ISDA's trickery in 2011? If the answer is yes, bond vigilantes may just buy CDS instead of selling bonds. If the answer is not, Europe's period of recovery is now effectively over, as any incremental selling will result in a vicious cycle whereby the full benefit of the LTRO will have been not only exhausted, but more LTRO will be demanded just to keep up with net issuance! And that assumes not additional selling as a result of that.
Sadly, ponzi schemes always end up being all too transparent, and never end well. This one will be no exception to the rule.
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Sadly, ponzi schemes always end up being all too transparent, and never end well. This one will be no exception to the rule.
So fucking true Tyler. Only problem is this one is going to hurt so many people :(.
...this one is going to hurt so many people
yes sir, exactly...and how much ya wanna bet it won't be the right people getting hurt?
It's always funny....until someone gets hurt.
Worldwide depressions, destroying average people since before recorded time.
It's not about the dry powder, it's about how much they're able to leverage (read: over-leverage) the existing LTRO "liquidity" into AAPL and PCLN.
Spain 5 and 10 year cds already back in November stress levels!!!
That seems unlikely, that 'market' went *poof*. It's really more of a Ponzi within a larger Ponzi so I think that other will step in soon enough.
I always expected Spain to be the wildcard.
Don't count out Italy and Portugal........they could come from the rear to be real shockers.
Funny that you mention that, Charles.
http://www.youtube.com/watch?v=MYtjpIwamos
What's the latest on the London Law Greek Bonds? Has it all been sorted or is still in delay mode?
Greece Set To Default On Foreign-Law Bonds May 15
Thank you. I must have missed it first time round.
With elections on May 6th this will give the new government something to think about. That's if a coalition has been formed by then.
Selling? Yes!
April 11 (Bloomberg) -- Japan’s biggest investors, with
$368 billion under management, say it’s too early to buy bonds
from Europe’s most indebted nations as rising Spanish yields
spark concern the region’s fiscal crisis has further to run.
Kokusai Asset Management Co., which runs Asia’s largest
mutual fund, Mitsubishi UFJ Asset Management Co., a unit of
Japan’s biggest publicly traded bank, and Diam Co., part of the
nation’s second-biggest life insurer, are all shunning Spanish
debt. Japanese investors sold a net $43.8 billion of euro-
denominated bonds in the 12 months ended Feb. 29, according to
figures from the Ministry of Finance in Tokyo.
“I’m not planning to add Spanish or Italian bonds anytime
soon,” said Masataka Horii, who runs the $21.2 billion Kokusai
Global Sovereign Open Fund in Tokyo.
It is difficult, if not impossible, to describe it mathematically since value is not a function of quantity, rather it is a function of quality. Quantifying a qualitative argument seems difficult to say the least.
Just take a quick look at stockmarkets worldwide in the last three months and it´s plain to
see that far, far from all the LTRO money went in to bonds. But don´t worry, they have a million and one schemes already waiting. The trick is to figure them out and ride the wave...
They might have dry powder left, but their powder does nothing to stop the onslaught of debt. It's like the movie Independence Day, where they drop a nuke on the alien spacecraft then realize that their nukes are ineffective against the spacecraft's shield. They have thousands more nukes to drop, but they might as well have none.
Looks like ECB back buying garlic belt again...
Drinks all around,bailiff, and standback, the defendant wants to hang himself
I love the assumption of the ECB that Greece is over...when nothign could be further from the truth until the next fiscal quarter.
SELECT * FROM tbl.DebtEuro ORDER BY ASC