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The Insanity Of The Sarkozy Carry-Trade's Contagion Risk In 3 Charts
The last month has seen a considerable amount of the post-LTRO gains in Italian and Spanish Sovereign and Financial credit markets (and stocks for the latter) given back. The stigma priced into LTRO-encumbered banks has also surged to post LTRO record wides - more than double its best levels now. This is hardly surprising - while the LTRO was nothing but a thinly-veiled QE printfest, it is the action that was taken with that newly printed money that has created dramatially more contagion risk and sovereign-financial dependence as an unintended consequence. The collosal (relative and absolute) size of the reach-around Sarkozy carry-trade buying in local sovereign debt for Italy and even more so Spain is highlighted dramatically in these 3 charts for BNP, most notably the increase in banks' holdings of sovereign debt compared to their share of Eurozone sovereign debt - i.e. the banks in Italy, and more so Spain, are hugely more exposed to their sovereign's performance and with Spain's massive budget cuts - a vicious cycle of austerity to growth-compression to credit-contraction to Greece (firewall or not) is leaking into their bond markets, even with an active ECB doing SMP although inflation-constrained from LTRO3 perhaps.
Italian and Spanish banks went on a buying spree...
In the three months to February there was a huge increase in Italian and Spanish banks’ holdings of sovereign debt. February data also showed a large rise in Portuguese banks’ holdings
But the scale of Spanish bank purchases is striking compared to the size of outstanding government debt...
Slovenia, Italy, Portugal and Slovakia also saw large increases in this context
And compared to Spain's share of Eurozone government debt, Spanish bank buying is incredible...
The increase in Spain is also exceptionally high in relation to its share of eurozone government debt. The reverse is true for Germany and France.
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They all need more austerity.
@ Bahamas
Austerity? Yes, but yikes!!! Look at what happened in Spain yesterday. They are cutting spending but the rioters were going crazy during the general strike. Europe (esp. PIIGS) have to cut spending...
So do we. Will it happen? Hmm...
If not, hide out in gold. Read all about it: "Marginal Utility and Gold". Google is your friend here, so is gmail.
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Even after the austerity moves, I would still like to have the greek retirement plan. Better then freedom 85 which is canada right now.
This gives Confederate money a good name by comparison.
Some shit you don't "sterilize"...some shit you "nuke from orbit".
This trade is nuts. I can see that the banks are taking the view that if their parent country goes into default they have nothing to lose. They will be gone too. However, there may be something else happening here. Maybe the idea of the LTRO's was, amongs other things, to get banks to buy their soverign's debt, whilst divesting themselves of the debt of otehr countries. If this happens over the longer term, it could allow a much cleaner break up of the Euro. Maybe that's the idea behind all of these plans. In that case, each of these countries can default on their debts, convert them to their new local currencies and then de-value away. Remember that the Euro acts like a gold standard for a country. It cannot inflate that debt away by de-valuing. Given that in recent history defualters have done that in order to manage unpayable debts, maybe that is the long term goal here.
Could be, but wouldn't the banks be better off if they all purchased German bonds and made a killing after break up?
Also, are there enough unencumbered assets to significantly change debt ownership structure of PIIGS?
They are buying a lot but compared vs. total outstanding and vs. the new fonds that are being put in place it's not that much.
I tend to think banks are smarter than the bureaucrats so it's unlikely that the plan is going to work in favor of the bureaucrats. The ransom theory makes more sense.
I agree the banks are smarter than the bureaucrats, but I don't think there's that sharp a divide between the two sectors anymore (if ever).
I'm pretty sure that one of the conditions of LTRO was that if banks didn't buy what they were told to, they'd find themselves being 'investigated' for mismanagement, fraud, mixing of clients' funds, you name it... ie, all the stuff they actually should have been hung, drawn and quartered for.
The banks (like the rest of us) currently now exist by the grace of the state... fail to give the state what it wants, and it will find some law/regulation you have transgressed and shut you down. But hey, that's fascism for you.
Using spell-check will get you more rec's and make you more attractive to the opposite sex (or any sex you'd like to have). It will remove that nasty "left-over-from-grade-school" cloud of self-doubt and yearning. Actually, it's important - it's the only method we have to enable communication around here...
Spell-check: Just do it.
http://www.merriam-webster.com/dictionary/colossal
Piss off
I think this is the idea. Get all the local banks to buy up their sovereign parent's debt, and when the time comes for default and EZ exit, each country can simply reissue it's own currency and recapitalize their home banks. I think this is a tacit acceptance to disband the Euro (or at least kick out weak periphery states) long term.
Nothing new here. All TBTF banks continue with buying insolvent governments so that they can threaten to blow the whole thing up if they don't get what they want. Same as it ever was. Second verse, same as the first, only with the fascism a little bit louder and a little bit worse.
They make bank off the investment, or make more from QEEuro for more debt.
What do they have to lose?
They learned it by watching the fed, of course not going to end well.