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LTRO Version 0.2
Via Peter Tchir of TF Market Advisors,
LTRO version 1.0 continues to capture the markets attention. It was a reason to rally, then fade, now back to an excuse to rally.
My contention all along has been that LTRO was good for banks. It dramatically reduced the liquidity risk for banks. It did nothing for the solvency of banks or sovereigns, and I continue to believe it doesn't do anything for the liquidity risk of sovereigns. I think the belief that the carry trade is at work is a fallacy.
Yes, Spain and Italy are doing better, but that has as much to do with some pent up demand, some not too subtle encouragement to roll debt, and a lot of shorts being caught offsides to the start of the year rally. The LTRO carry trade has little direct evidence of being at play. Banks do buy sovereign debt and had debt maturing over the past quarter, so it is not surprising they might buy some more. The ECB continues to attract huge deposits which is an indicator that the LTRO carry trade is not being employed as widely as many people would like or hope.
Italy in particular has a weird dynamic the market is still trying to digest. Italy guaranteed bonds so that banks could get ECB money, allegedly to buy Italian bonds. In an attempt to be more "family friendly" I will go all Disney on you and call this the "circle of life" trade rather than a ponzi scheme, but in the end, the banks and countries are becoming one and the same in the weakest countries.
We will soon find out whether the next tranche of LTRO is version 2.0 or version 0.2. I have read some articles where people are hopeful that the next tranche will be at least 500 billion and could be as much as a trillion. I expect full disappointment for that crowd. I believe the next tranche of LTRO will actually be smaller than the first tranche!
I believe the banks accessed LTRO for 2 important reasons. One, they wanted to consolidate a bunch of borrowing they had from the ECB via a hodgepodge of other lending programs ("emergency" and otherwise). They also wanted to prefund their debt maturities for the year. They know there is minimal demand from short term bond investors (or long term ones) so they wanted to ensure they borrowed enough via LTRO to be able to pay off all their debt coming due this year. They did NOT take down LTRO to buy new assets and are still in deleveraging mode, so will NOT use the next LTRO offering to take on new money.
Banks are deleveraging. LTRO is making it easier for banks to manage their near term liquidity risk. That has helped ease pressure but has not turned banks into "risk on" mode. We will see what happens but I believe that the second tranche of LTRO will be a pale comparison of the first in terms of size which will damage market excitement over how much of the "carry" trade is going on.
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Isn't the LTRO a wholly demand-determined auction and the ECB will supply basically anything demanded (at the ECB-given interest rate), i.e. infinitely elastic supply? I don't get how they come up with these amounts 500b, 1tr, ...
Yes it is.
Full allotment. So it'll be whatever the banks demand. Billions, trillions, gazillions, if they wish.
(It was great talking to myself)
What is colateral aganst the LTFO loan? Just wonder
from some greek and italian banks its been self issued govt guaranteed bonds ....
In addition to the ABS that are already eligible for Eurosystem operations, ABS having a second-best rating of at least “single A” in the Eurosystem’s harmonised credit scale at issuance, and at all times subsequently, [1] and the underlying assets of which comprise residential mortgages and loans to small and medium-sized enterprises (SMEs), will be eligible for use as collateral in Eurosystem credit operations
residential mortgages and loans to small and medium-sized enterprises? Pre bubbled or post?
They simply guess how much demand there might be.
Why can't Europe go "full on Japan"?
But the second tranche will have to be bigger. Much bigger.
Question is, how much of it shows above surface.
Backroom deals, swaps and dark pool pipelines are legion.
It's like QE to infinity. Euro version.
ori
/shattering-midass-curse-gold-de-spell-ed/
I think it will have to be the same size. The existing debt rollover is smaller, factor in a multiple of growth (7%) and I think it will have to be the same. I am going from memory, so I could be wrong about the numbers. It will make interesting research.
I think the debt bomb will find it's explosion on the streets of highly in-debted nations. All asian nations are running at capacity as far as debt taking on goes. Projects cannot and do not move fast enough here.
Please understand, everyone, that Japan could survive these last 20 years because they are so damn efficient at using capital. They can keep building beautiful bridges to nowhere. Besides the carry trade, and their overseas "loans" (always in favour of Japanese contractors).... but the Yen has cycled furiously in Japan and globally.
India? It can attempt to print to infinity. But infinity will last a month, at most. Capitally in-efficient nations will always be chronic debtors.
The perfect debtor's trap.
Set up the slow-down bureaucracy, the choke money down the systems throat.
And skim the cream off the top.
ori
First poster. i agree. i could however also be wrong. also remember hearing draghi speaking in the sums of 500 to slightly less (480ish?).
Draghi expects it to be lower (yesterday in AbuDhabi):
It doesn't need to be larger because the next rollover is smaller. That is the logic anyway. I think it will have to be the same size as the last one if Europe is going to hold on loosely.
draghi said it clearly in the last Q & A. The profile of borrrwers closely matched the eurobanks capital funding requirements.
as the greeks say " para kato" = move onto the next point..
they arent the ones that deposited it. which means having coverd their capital requirements they lent against it.
but they arent going to damage their liability profile having just fixed it so they rebalanced (fund flow into JUNK + AAA) = no Euro sov bond carry trade, except with some new bond issuance
so yeah i can see the point LTRO 2 = LTRO 0.2
They are simply filling the banks to the brim with liquidity before the whole shooting match implodes.
Ignore what they say. Watch what they are doing.
just a curious question --Is the ECB printing Euros for the LTRO and if so isnt that alone adding money supply thereby reducing the value of the euro?
not a macro guru, but IMHO, as long the money is deposited back to the ECB it is obviously not creating additional money supply.
BTW, deposits fell sharply to EUR 395.327bln from Tuesday's record EUR528.184bln!!!! - isn't this a major flaw to the article?!
March 20th 2012 should prove to be a very interesting day.
The 79th day of the year (80th in leap years) in the Gregorian calendar?
The official size will depend on market sentiment. Given that the REAL and ONE and ONLY message the ECB emits to market is : We will never let our Euro banks go illiquid. If the market speculation abates the LTRO rnd. 2 will be slimmer. If it takes a mega hammer to kill the spreads on new sovereigns DRaghi will do it. He has GS blood in his veins. He knows how the squid thinks.
He will print and backroom sprint to save his and Eurobanking collective skins. The three year roll over is now in place, the can kicking will continue. OFFICIAL size depending on speculation and market aggression. As what this implies is that we let debt grow in the illiquid banking cum sovereign sectors. Two blind mice taking the whole Eurozone closer to the cliff, what? in five years time? Who can tell when this charade will end!
Whatever the sovereigns may do to slim down their spending, it will KILL consumption and one day they will have to face debt mountain wall as the itsy bitsy teeny weeny polka dot bikini growth will not stay in pace with runaway interests on debt brokeback mountain.
I'd bet against Peter on this one - the head of the ECB is a Goldman alum. Free money will flow to the banks endlessly. LTRO 2.0 will be at least $1T, and may be extended out 5 years.
Trebuchet and Cognitive Dissonance seem to have nailed it.
And falak pema (sorry, read your well written post after the others) - Draghi will be remembered as the worst ECB President (and the rest aren't great). He has absolutely no idea what Frankensteins he's creating. Untested, unorthodox policy on this scale can only end in tears.
The truth about SOPA is ?????? ?????? ?????? ???? ????? ?? ????? eh cut it out. Who the hell is censoring this?As I was saying the truth about SOPA is ?????? ?????? ????? ?????? stop it you utter c ?nt!
Lots of good points here and I think all have some validity:
- ECB wants to send a message that they will print and print and dare the market to face it down
- Banks using LTRO for funding needs (see RBS for example) and capital reqs but not so sure about the carry trade thesis. Clearly however it's whetting someone's appetite - whose?
- Huge firewall of liquidity being built up in case situation spins out of control
The problem is, as in every area of life, the more you do something, the less its marginal efficacy. Huge amounts of money released into the market and still the SPX moves very cautiously. Money printing is all they have left and it too will exhaust itself. This is the simple rule of diminishing marginal returns. Add that to the Law of Unintended Consequences and we have an ugly storm brewing. Germany will rue the day it allowed Draghi free rein.
Completely agree about the ECB wanting to send a message.
We all know surging overnight deposits at the ECB are an indication of incredible stress in the interbank funding markets. However, as to whether the carry trade is 'back on,' I think it's interesting to note the relationship between withdrawals from the ECB and peripheral debt auctions. Obviously, it's complicated, but that seems to suggest banks are putting the carry trade back on. Top of my head, over 100B was taken out the day before the big Spanish and French auctions earlier this week.
The point about recent auction success being mostly notes and bills is a good one. However, if the long end were to get sloppy, I think part of the message Draghi has sent is that he stands ready to do something about it. Whether it's LTRO 2.0 (Feb is still 1.0...same program) whereby they offer 5, 10, or 30 (?!) year loans, or something else, given their action to date, I don't see the ECB standing idly by.
Re decreasing marginal returns - at some point these measures will amount to pushing on a string, but it depends on the degree of concavity and where we are on the curve. More accomodation could still have a significant marginal impact. Tough to know.
Very tough to know indeed - this is a curve whose gradients are unknown and unplotted - but something tells me we are at a tipping point sooner than most people think.
Central banks are good at one thing: buffering collapse. They do not engender risk-taking.
Spain sold 3B euro of 10-yr bonds this week at improved prices. Various auctions at the short end of maturity curves went well (i.e., yields dropped). And this is supposed to be primarily attributable to shorts covering and banks rolling their maturing debt holdings?
I just pulled up the ECB's total balance sheet (EBBSTOTA:IND in Bloomberg), and it's been declining since year end. These back-of-the-envelope data points suggest LTRO proceeds are being used to buy what the sovereigns are shoveling.
It's a new year, and bankers want to get paid. Parking billions with the ECB at a 75 bps loss ain't gonna git 'er dun.
Collateral squeeze as strong as ever, Icap says
perhaps, that could be because the repo market is in direct competition with LTRO, no?
not a collateral squeeze, but rather a shrinking market share of the repo business in the funding arena?!?