The MF Global Trade Is Not Coming To (European) Town - Why The ECB's 3 Year LTRO Is The Latest Bailout Flop

Tyler Durden's picture

On Friday, as the Eurobond market was briefly soaring, we attributed the move to sentiment that was best captured by a note out of Morgan Stanley's govvie desk: "The carry trade is happening, there is no doubt about it. In SPGBs (45bps tighter t0) we estimate 15-20bn (incl 6bn auction) of buying from domestic mid sized banks and cajas THIS WEEK (500mm is usual 2way trading volume per day). We are seeing the same starting with Italian mid tier banks in BTPs today (35bps tighter t0). Also Ireland seems to be very well bid up to 2016 maturities (75bps tighter on day). While Huw and Laurence anticipated this in their research piece on the LTRO from yesterday, we certainly did not expect it to be this intense and front loaded, this is the strongest buying we have seen all year, it feels a lot like QE." In simple summary, what MS was hoping and praying (because if clients are buying, MS is selling) its clients would believe, is that European banks would promptly forget that Europe has trillions of rolling over financial corporate debt, and instead of focusing on generating the cash needed to pay down maturities if no buyer stepped up, banks would somehow re-lever, by buying up even more sovereign debt in hopes of catching a few bps of carry, and completely ignoring the "#1 issue at the heart of the Eurozone crisis"TM - the fundamental supply/demand paper maturity mismatch. Not to mention that any statement which needs the redundant "there is no doubt about it" is a 100% lie. It took the market about 3 hours to wake up from its zombified state and to do a 180, proceeding to rapidly sell off European debt following the realization that the Morgan Stanely thesis is nothing but a purely self-serving lie. The folks at Reuters IFR explain why MS completely botched this one up, and why Eurobanks are finally starting to wake up to the realization that the MF Global trade just may not be coming to town.

But first, some more from Morgan Stanley's attempt to urgently push clients into European paper:

Between now and 2012, the ECB's first 36 month tender allotment on December 21 will be a key event. We believe that the ECB's package of supportive measures significantly reduces the tail risk for euro area banks; and there could be a surprisingly large aggregate take-up at the December and February's tenders combined, which could put a significant dent in Spain's (and to a lesser extent Italy's) 2012 funding needs (see 3 yr LTRO: policy support just for banks or sovereigns too? , December 15).

While we wonder why the sudden urgency by MS to dump European paper before its fiscal year end (after all, like Jefferies, Morgan Stanley has repeatedly told everyone who cares to listen it has zero net European sovereign and bank exposure... As for gross, well that's a different story), we will leave that for another day. What is more relevant to the topic at hand is the refutation of the fundamental logic in the Morgan Stanley meme, which was incorrectly parroted by various C-grade media as a real deus ex, by IFR, as follows.

Banks are unlikely to come to the aid of debt-ridden eurozone countries, with many planning to ignore political pressure to use cheap money from the European Central Bank to fund purchases of sovereign bonds.

 

With eurozone governments needing to sell almost 80 billion euros of fresh debt in January alone and bond yields rising by the day, the stand-off between policymakers and banks could turn Europe's slow-burning debt crisis into a full-scale conflagration in the New Year. Burned by Greek losses, and under the scrutiny of shareholders, banks have slashed their exposure to weaker European sovereigns over recent months. Senior bankers say they will cut further, despite pressure to use newly available, longer-term ECB loans to buy government debt as part of an officially-sanctioned carry trade.

Here is the quote du jour which will be making the rounds around trading desks on Monday:

"When investors are constantly asking what you have on your books and the board is asking you to reduce your exposure, it doesn't really matter about the economics of the trade," said the treasurer of one of Europe's biggest banks. "Am I going to buy Italian bonds? No."

Bingo. And it gets worse, because when one of the biggest double downers, the head of UniCredit itself, a bank long known for dollar cost averaging in failed BTP bets, says Basta, it's time to get the hell out:

That view echoes comments from UniCredit chief executive Federico Ghizzoni, who this week told reporters at a banking conference that using ECB money to buy government debt "wouldn't be logical". The bank had traditionally been one of the biggest buyers of Italian government bonds, with almost 50 billion euros on its books.

So to all those who say the LTRO has magically been ushered as the European bailout mechanism, we counter with the following which promptly destroys any arguments to the contrary:

[R]ather than use money raised via the ECB to buy government bonds, bankers say that they are more likely to use the funds to pay off their own debts.

 

"I can't think for a moment why anyone would want to [buy eurozone government debt]," said the head of capital markets at one European bank that is also reducing its exposure to eurozone sovereign bonds. "Everyone is trying to protect capital. It's counter-intuitive. It would be digging a deeper hole for yourself." "Banks need this liquidity to get them through the wall of refinancing they are facing next year. That's where the money is going to go." Such attitudes will come as a major blow to European policymakers, who had been hoping banks would use ECB money to profit from the carry trade, helping governments in the process. "Each state can turn to its banks, which will have liquidity at their disposal," French President Nicolas Sarkozy said after last week's summit of leaders.

And there it is - despite hopes by the central planning authority that they always know what is best, the market has finally awoken to what we have long dubbed the #1 intractable mathematical problem in Europe - one of too much supply and not enough demand. This is, as we dubbed it, the European Death Spiral, although Debt Spiral works just as well - the issue is that there is €2.5 trillion in deleveraging coming due in the next few years, and by using an ECB facility to relever even further goes against the whole premise of said "deleveraging"

Everything else is smoke and mirrors.

And for those in doubt, we will get the answer one way or the other soon enough:

Bond sales in the New Year will be a big test of whether the strategy will work. In the first quarter alone, Italy plans to sell around 50 billion euros in fresh debt and Spain 21 billion euros. If Rome is unable to find buyers for its debt, that could jeopardise the payment of 28 billion euros of maturing debt on February 1 and a further 16 billion euros on March 1. Spain doesn't have any major redemptions in the first quarter.

 

"It's potentially going to be very very challenging," added one debt banker who is involved in the New Year sovereign debt sales.

 

"While steps are being taken, the crisis is far from over," added Mark Schofield, an analyst at Citigroup. "There is ample scope for rewidening as the market gets ahead of itself and as each bubble of optimism is pricked by reality. At the risk of sounding like a broken record, things will get worse before they get better."

Perhaps that explains why, now that its latest bluff has been called, Europe has fallen back to the trusty old standby: we have just learned that Euro ministers will hold debt crisis phone talks on Monday. And that, as everyone knows by now, is the cue to sell.

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Manthong's picture

"debt crisis phone talks on Monday"

Why? I thought they lobbed an RPG bazooka into the ring fence to fix all that.

disabledvet's picture

Guess they got a financial "Irish car bomb" instead.

DeadFred's picture

Crisis phone talks lead to 3 PM rumors. They will need them. Cramer is quiet. Goldman is subdued. Not a lot of angst floating around the web about the week ahead. This equals a sell off in the works.

StychoKiller's picture

And the love-fest for the $ continues...

GeneMarchbanks's picture

'It took the market about 3 hours to wake up from its zombified state and to do a 180, proceeding to rapidly sell off European debt following the realization that the Morgan Stanely thesis is nothing but a purely self-serving lie.'

Boy, that is one dumb 'market' if I ever saw one...

'That view echoes comments from UniCredit chief executive Federico Ghizzoni, who this week told reporters at a banking conference that using ECB money to buy government debt "wouldn't be logical".'

Logic is so old fashioned.

mac768's picture

"Common sense is not common in this times...."

Schmuck Raker's picture

"This is why we elect smart politicians..." - A Great Man

d_senti's picture

Use a money printing fiat institution to give money to bankrupt institutions in the hope that they will invest in other bankrupt institutions so as to sustain a morally bankrupt institution and preserve the money printing institution's power to print money.

Banker logic has saved us once again!

disabledvet's picture

wait 'till you see what the government has in store for ya.

mac768's picture

100% sure, there is "no doubt (lie)" about the facts ...

short the MS

whatsinaname's picture

so is the 2 month tax extension in the US going to delay the inevitable ?

And how desperate are US banks for some relief aka (the official) QE3 ?

disabledvet's picture

Which ones? The big ones with no money or the middle market dudes "raking in the dough."

ISEEIT's picture

Governance in crisis?

In real people speak: The lies just aren't 'doing it' these days.

Rote-roh. 

Irish66's picture

Another bank must have fallen so we can only make phone calls. Travel is restricted due to budget crunch.

 

Manthong's picture

Except if you are a technocrat.

Their T&E tab alone could probably bail out Greece.

MsCreant's picture

Imagine if we saw them huddled in small hotel rooms, eating cheap takeout, wearing the same suits they wore last week, being all Austere an stuff. Refusing entertainment, flying economy class, for the sake of the people. (I gotta stop it, I'm killing myself laughing here).

falak pema's picture

Sounds like the good old days, when we were young and a glass of bojolais and a swirling skirt in a gust of wind was all you needed to feel on the right side of time line, like jumping toast on bed springs, huddled, befuddled by sweet symphony; not skullduggery deadened in corporate humdrum.

PulauHantu29's picture

"House prices always go up" is what all this Eurzone BS Spin reminds me of.

GeneMarchbanks's picture

Not really though cause that still applies if you're in Vancouver...

falak pema's picture

"No, No, No, NON, NOOON", Says Noyer of Noyer and Noyeroia of Ze Bank of THE FRANCE. "We can do both deleveraging and releveraging. You don't understand the french language. When we invented the Knight Templars, our Saint Bernard said; to do God's work, he would be BOTH armed knight AND priest. And don't tell me its against canon law and what Jesus said..."render unto Caesar...". Saint Bernard said it was ok, so it's oK! Knight Templars can kill in Holy LAnd to do God's work and also be priest guarding the Holy Sepulcher."

Voila, its a thousand year old formula. Its older than the Coca Cola formula. And its like what Corzine learnt, when at Univ. of Chicago business school  he came and spent a summer picking grapes at Clos Vougeot. 

We taught him that re-hypothecation was NOT incompatible with de-hypothecation. You can do both. It all a question of flexibility of the wrist when you break ze financial egg, you do one way in springue...and ze other way in how to you say? ze fall? yes ze full foul fall. 

There, it is a special way of making ze grapes of Clos Vougeot, the grapes that never grow sour, how do you say, yes, ze grapes of wrath! voila!

Now go be a good boy and tell ze Ben from the Fed, we are pleased to buy his lousy dollar out of pure generosity. You know we must turn from time to time, how do you say? yes, ze other cheek! voila! Now you know the french way to make pommes frites.

disabledvet's picture

"as long as you're shoving other people's money in your own pocket it's all good."

falak pema's picture

voila, you have ze flexible wrist...bravo!

Kayman's picture

falak pema

Ah, oui, the French.

Non, monsieur, it is you who should be thanking me, for allowing you to save my life.

No greater example of French arrogance than DeGaulle.

earleflorida's picture

tis, not god's work, 'nor' hand, that serves up the cold dish?

quite hitherto,... too running the gambit [futility], ala, of centrifugal force on an infinite fulcrum plane, only to realize, that energy [$$$] consumed was all in vain, for gravity knows no other logic than the laws of the [financial] universe - inflexible to gaming any such system therein [?] - without total collapse within.

falak pema's picture

You've perfectly described the feeling of neutrinos zipping along in the Hadron collidor underneath Geneva and France...wowieee, I feel I'm in that shute.

Rainman's picture

Don't worry, someone whose first and last name starts with " B " will buy the bonds.  Hint : " We have many tools at our disposal ".

ISEEIT's picture

Sure. But when? Timelines matter as much as do events.

Rainman's picture

You silly rabbit ! Ben and Barry are both entering their last year as members of High Command. Expect many mid-court three point shots from both of them !

MsCreant's picture

Tools, members, ya gotta stop.

gmrpeabody's picture

Looks like somebody is spiking the eggnog a bit early this season... too funny!

MsCreant's picture

So Ben and Barry are real tools. When do we dispose of them?

GeneMarchbanks's picture

"Drivin' that train, high on cocaine"

Berlusconi was right about them traders...

Whookudaknowd

ebworthen's picture

Bullish for Gold and Silver, and U.S. 10 Year at 1.5%

ISEEIT's picture

Now THAT is a bubble to buy at the top! ( not, because when the rate gets that low, the game is already over, the bond will be for all intents and purposes worthless) May as well flip a coin though. The one thing this ponzi does well is maintaining instability. Gotta give them a big thumbs up on that one. A job being well done.

Clap, clap.

disabledvet's picture

"how is one to know whether an...irrational exuberance has taken hold?" Alan Greenspan.

economics1996's picture

I like guns, ammo, food, water.

Dr Paul Krugman's picture

I like Tchaikovsky, dry martinis, the beach, and soap.  But hey, I guess the apocolypse is right around the corner!

disabledvet's picture

I'm a fan of "The Lion in Winter" myself.

Duffminster's picture

If anyone believes that the involved hiearcy (the international network) will allow an unstoppable deflationary depression and a failure of hundreds of trillions in deratives through a massive default chain without first running all the printing presses 24x7 is not thinking clearly.

Depression and hyperdeflation are not politically viable either among those who seek to dominate or those who are currently dominated.   If nations default on their bonds, especially the US, the associated currenices will be completely worthless and nearly over night.

Running the printing presses will give more time for the international network and the super rich to get possession of as much gold and silver as possible while preventing an exponential spread of the Arab Sring and Occupy Everywhere to the point where the natives are showing up with more than protest signs.

Merkel and the Fed say a few remarks and then Draghi chimes in and all the sudden all the idiot funds think that they won't be running the printing press or it will slow.  No way.  Its already running 24x7 but, at least at the Fed, you haven't seen anything yet.  

The longer Ben waits, the more he will have to print later.  We are dealing with full on insolvency and the only possible politically viable solution is to turn up the burners at the press.

Its that or You'll Ron Paul or Newt Gingrich as President, the Fed being shut down, and when that happens, Wall Street will be mostly out of business in my opinion and it will set the stage for a new revolution that will make the Tea Party and Occupy look like a child's depiction of an innocent path to freedom.

Just a thought.

Duffminster

Duffminster's picture

If anyone believes that the involved hiearcy (the international network) will allow an unstoppable deflationary depression and a failure of hundreds of trillions in deratives through a massive default chain without first running all the printing presses 24x7 is not thinking clearly.

Depression and hyperdeflation are not politically viable either among those who seek to dominate or those who are currently dominated.   If nations default on their bonds, especially the US, the associated currenices will be completely worthless and nearly over night.

Running the printing presses will give more time for the international network and the super rich to get possession of as much gold and silver as possible while preventing an exponential spread of the Arab Sring and Occupy Everywhere to the point where the natives are showing up with more than protest signs.

Merkel and the Fed say a few remarks and then Draghi chimes in and all the sudden all the idiot funds think that they won't be running the printing press or it will slow.  No way.  Its already running 24x7 but, at least at the Fed, you haven't seen anything yet.  

The longer Ben waits, the more he will have to print later.  We are dealing with full on insolvency and the only possible politically viable solution is to turn up the burners at the press.

Its that or You'll Ron Paul or Newt Gingrich as President, the Fed being shut down, and when that happens, Wall Street will be mostly out of business in my opinion and it will set the stage for a new revolution that will make the Tea Party and Occupy look like a child's depiction of an innocent path to freedom.

Just a thought.

Duffminster

Duffminster's picture

I agree ebworthen but mainstream is only publishing the spin about the majority of economists conensus that gold will be down in Q1.  Good contrarian indicator?

Contrarian thinking indicates that when a boat load of Kensyian economists think that gold is going down, chances are its going up and the capitulation by the weak longs who have no conviction to the fundamentals, the purely hedge fund types like Paulson, Cramer, Gartner and the like) who appear to me to primarily use gold to try to generate speculative profits during periods of economic instability is an extremely healthy sign as increasing demand for actual physical gold as collateral for all the hypothecation and rehypothecation taking place is likely to be a primary catalyst to the markets. For those of us like me who see gold as honest money that keeps governments honest about how much they can spend, the long term value of gold is that it is actually real money.  Lease rates were dropped to next to nothing and central banks are liquidating like crazy with the likelyhood of a major bank being stealthly bailed last week by the Fed, I'd say it boils down to this: "in the end, he or she who has the physical gold firmly in their own vaults will be the victor." To me, it looks China knows this and much of the old world too.  Its just the desperate Central Banks using every trick (per the GATA playbook) to control perceptions but those who know the end game use every raid to accumulate more physical gold and silver in my opinion.  Any of top 20 billionaires in the world could single handidly purchase most of the available physical bullion in the world and given the degree of leverage that silver has on gold, I wouldn't doubt that more than a few are considering it.

There are a few great articles I read today that I think anyone serious about considering gold and silver for long term wealth preservation might also find informative. Here are the titles (you can easily find them through your favorite search engine. Mine is still Google).

15 Brilliant Insights From Hedge Fund Superstar Kyle Bass
"Charlatan Exposed: Negative Gold Lease Rates" - AUG Mentor
Pathogenesis of Central Bank Ruin - Gold Seek
"Citi Predicts Gold At $3400 In "The Next Two Years", Potential For Move As High As $6000"
Analyst Sees Strong Oil Prices, $2,000 Gold Ahead

My personal view of things are quite a bit different from those of this article. I think about this subject a lot.

Despite the jawboning by Ben at the Fed and Draghi at the ECB about no immediate easing, the fact remains that they are the current sovereign debt “market” if you can call it that.

It is a vacuous market and in an election year especially, with the prospect of having “End the Fed” candidates running the country in 2013 like Gingrich or Paul, the likelihood that more overt QE will not be catalyzed by the clear and present danger of a downgrade driven, bank failure catalyst, resulting in lower over all equities (and resulting lower quality rehypothecation collateral) is next to zero in my opinion.

The fact that the BRICs are seeing substantial GDP growth contraction, that austerity and completely un-repayable toxic debt backed currencies are under pressure and that the so called “super summit” in the EU basically resulted in a blank piece of paper that has changed Nothing, resulting in a contraction in EU growth and with negative real interest rates in the UK and US and likely elsewhere, gold remains the only money (not a fiat
Currency) and is not encumbered and backed only by toxic debt. As such, the Fed and ECB will have to apply shock and awe levels of QE just to keep the S&P from falling to 800 and putting Gingrich in office, which results in a deeply weakened Fed and likely a long range hyper deflationary depression and global social revolution and the end of Central and TBTF controlled governments.

In my opinion the downgrades by Fitch on eight global trading universal banks this evening is indicative of why jaw boning needs to be pro-QE and not
Anti-QE as a strong position on QE will keep the required collateral up in dollar valued terms where as the Merkel approach will only trigger a lowering of collateral quality in the global rehypothecation derivatives chain where counterparty solvency is questionable.

Anyway, just what I think.

Duffminster

 

Dr Paul Krugman's picture

Traders who got their funds frozen in the MF Global debacle aren't going to turn into gold bugs just because of the bankrupcy.  They most likely will realize gold does not produce anything and is merely speculative, which you were correct about for Paulson etc.  This should be bearish for the price of gold.

disabledvet's picture

if gold can be stolen legally then whether it's worth billions is irrelevant. "it's no longer yours." needless to say the government does not care and as such "i'd be bailing on GLD" like it's the most worthless asset on the planet. the shocker has been the collapse in yields in the Treasury complex. this has nothing to do with the Fed's "twist" and may indeed show...yet again that "Ben Beranke has been a consistent optimist as it relates to recovery throughout the ordeal." A minor flaw of course in an otherwise perfect diamond.