Proof Of LTRO Bank Stigma, Or Why Mario Draghi Is Lying

Tyler Durden's picture

Earlier in the week we began discussing the stigma that would likely be attached to the banks that decide to borrow from the ECB via the LTRO. Many talking heads including Mario Draghi himself, arbiter in chief of all risky collateral in Europe, dismissed this - reflecting back at the compression in credit spreads in the market-place as evidence that all was well and confidence was returning. In the last week our (senior unsecured debt) index of LTRO-ridden banks has underperformed non-LTRO-ridden banks by 23bps to a 75bps differential. This is the largest divergence since the LTRO began and corrects off mid-Summer tight levels of difference as the critical flaw that we also pointed out earlier in the week (that of the implicit subordination of bank assets via ECB's LTRO collateralization). Credit Suisse agrees with us and expounds on 'the flaw' in the LTRO scheme noting that the market is fickle and self-sustaining at times (as we have seen) but over time (and that time appears to be up this week), the market will weigh the liability side of the balance sheet versus the asset side, less haircuts (which implies haircuts will become the de facto capital requirements) and inevitably (given bank earnings potential) reflect this huge differential - most specifically in the senior unsecured debt market. With few shorts left to squeeze, spreads back at pre-crisis levels and financials having dramatically outperformed even large gains on sovereigns, the weakness in senior financial debt in Europe this week is more than just a canary in the coal-mine, it should become the pivot security for risk appetite perception.

Via Bloomberg:

There is no stigma whatsoever on these facilities,” Draghi said at a press conference in Frankfurt yesterday. “Some have made some sort of statements that I would call statements of virility, namely it would be undignified for a bank, a serious bank, to access these facilities. Now let me say that the very same banks that made these statements access facilities of different kinds -- but still government facilities.”


We Disagree (or rather - the senior unsecured debt market Disagrees)

Our indices reflect the average credit risk of six major banks that accepted LTRO loans EULTRO (and hence subordinated their senior unsecured debt holders) and six major banks that did not EUNOLTRO. The lower pane shows that the difference compressed back to pre-crisis levels of the summer and this week, as the reality of the flaw in the LTRO was brought to people's attention, the Stigma of LTRO subordination has appeared writ large in a quite significant underperformance (of almost 50% rise in the spread differential).


Credit Suisse: The Flaw

The market is essentially proceeding on the assumption, as we see it, that banks’ capital requirements can be met organically, through earnings and deleveraging. We want to be very careful about leaning too hard on this; we have insisted for a long time that the banking system needs to shrink, and that the capital markets would grow to match. But this is not a short-term process and cannot be, if it is to remain orderly.

The 2011 consensus range of bank capital requirements was € 100bn to €400bn; the log. average, €200bn, always seemed like a sensible estimate to us. The market is proceeding on the assumption that the need has all but gone away; many estimates now centre on €50bn. Such numbers strike us as ridiculous; the Greek banks alone are absorbing that (see above) and Anglo-Irish absorbed €30bn. This is (yet) another of those cases where a number is small until it is needed, at which point it grows.

But the market has made these moves in thinking despite our long asserting the premise that liquidity cannot cure a solvency issue, and it is liquidity that has been the big change.

What’s happened?

Partly, “the paradox of thrift”. Each bank individually can credibly plan to delever, but collectively the system cannot. But even if the inherent contradiction is recognised, it is hard to act on immediately.

Debt is no cure for debt. What it can do is prevent a self-fuelling Fisher-style debt-deflation and it is clear that the LTRO has at least to some extent achieved that. And it can buy time such that, if the basic business model is restored, solvency can be earned. But we are not sure the business model has been restored; far from it. Here again, our caution and outright mistrust needs to be tempered, and at least patient. But the apparent widespread notion that the LTRO is a game-changer simply does not wash in our view, because of our premise. Game-saver (no Fisher); yes. Game-extender, which makes it a potential gamechanger; yes. Outright game-changer; no.

So what’s the flaw?

The flaw is that, even in 2012, we retain respect for markets. Unfettered, they are not the tool of choice for resolving the current situation but we see it as essential to work with them and harness their power, rather than against them, as we discussed in Twelve Steps.

In Greece it is now clear that the process of avoiding a credit event for the past 21 months has been ruinously expensive. Frustrate the markets (again, individuals making rational, fiduciary decisions, not some conspiracy pursuing an agenda) and they will find a way  around the frustration, in our view; in the meantime, costs will increase due to the inefficiencies created, as has happened in Greece.

The result that we now expect in the European banking system is in our view rather beautiful.

The Basel Accords have a patchy track record – to put it at its most generous – and the EBA has almost no track record at all and as we see it, even less credibility in the eyes of the market. The market is fickle (and in this situation self-fuelling, so it must be tempered; indeed it has been by the LTRO), so it cannot even trust its own estimates (as stated above, they are all over the map). But it cannot be frustrated in seeking comfort on such an important issue as restoring trust in the biggest banking system in the world, in our view.

In the banking system just as in Greece, the rescue funds are coming in at a senior level.

There are therefore two kinds of bank; those with the market’s full confidence, which will be able to fund at a “senior” but partially subordinated level, and which can repay everything without question (see Flash of 20 January) and those who cannot. The price of time to the latter is ever-further subordination in a self-fuelling circle. Over time, the market will empirically, and with efficient pricing, weigh the liability side of the balance sheet versus the asset side, less haircuts (so haircuts become the de-facto capital requirement), tranche by tranche, maturity by maturity, and see what happens. If there is any insolvency in the European banking system, it will eventually appear, independent of Basel or EBA requirements (which may still becoming binding, of course). But it is hard to see how it appears before some time has elapsed. In this environment, competition for retail deposits, of which the European banking system is chronically short, largely because of its size, will become ever more intense.

Inevitably, due to the mark-to-market nature of repo, the banking system is now even more sensitive to mark-to-market, further baking volatility into the cake.

This reinforces our idea that the ultimate arbiter of bank capitalization is the senior unsecured market.

We suspect that organic earnings retention cannot be the solution.

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resurger's picture
Papademos to Greek Ministers: Back Bailout or Quit

He should be Killed!

walküre's picture

Meanwhile in Germany the actual cost per citizen in case of a Greek default is calculated at about 650 Euro or 52 billion Euros - worst case scenario. That includes 16 billion cash payout from 2010, includes government owned bank write-offs and includes Germany's 27% part of ECB loans to Greece.

Write off potentially 52 billion now or go down the drain with another multi-billion Euro packaga and write off 52 billion +++ x

Greece is going to go kaputt on March 20th for sure.

Maybe they can recoup a few cents on the Euro, but I'm not hopeful. It will be a crapshoot either way.


resurger's picture

WEll, its better off for them to go bankrupt than having the Troika enslaving the people.

walküre's picture

The real drama is that the people, both Germans and Greeks would welcome the bankruptcy and default. It's quicker and healthier in the long run.

But our banking overlords and their political whores are not letting it happen.

So, how much longer before we will see some real blood in the streets of Athens and Berlin?

People demand to take back their country from the claws of a financial elite which doesn't know when to stop?

This won't go away. Too much drama, too much at stake. This can't be fixed.

AUD's picture

It won't be fixed while the banking overlords are enabled by the political whores to monetise the debt of the political whores, which the banking overlords can then use to leverage against, which will eventually lead to a credit crisis.......

Olympia's picture

Germans are proved to be the easy solution to breach Europe’s door. Whoever wishes to “set foot” on Europe and demolish it, the only thing he has to do is to “fool” the Germans. For a second time in less than fifty years, Europe’s idiots become the victims of foreigners and they serve their interests at the expense of Europe …it is for the second time that they take money from foreigners and they turn against their European “brothers” under their lenders’ orders …it is for the second time that the family’s fool takes “candies” from the “#r” of the neighbourhood in exchange to get him into the “bedroom” where the younger “siblings” sleep …In the “bedroom” which is common today due to the European Union...

Germany handed all the European countries over to the Jewish loan sharks, by naively believing that this way they would let Germany free. Germany put the European family at the “target” of the “markets” and it is collecting profits every time one of its members gets “executed”. The loan sharks who pretend to be the “hunters” are shooting safely in the European “hen house” because Germany has managed to “raise walls around” Europe. One after the other, Europeans are destroyed so that Merkel can pay the stupid and artificial German debts to the loan sharks. 

As in all previous instances, once again its “fairy tale” is extremely misleading. Nazi Germany who used to destroy Europe in the name of the Greek ideals, does the same thing today. The surrendered, corrupting, competitive after receiving subsidies and extremely anti-European Germany pretends to be the unrivalled European power that fights for the European unity and against the corruption. This country that took advantage of the unification to serve its national interests, requires from the other countries to sell themselves out in the name of this unification. This country that even today keeps corrupting anyone around it, it threatens the corrupted ones. It “vomited” over a whole continent and now it is looking for the “spot” on its victims to punish them.


Zero Govt's picture

You're blaming Germany for Europes debt debacle?

I agree being the hub of the Euro-loan program and allowing the suicide socialists of Greece et al to pig out on cheap debt with the thought that the Fatherland might be backing the debt 'helped' somewhat along the way.

But the responsibility for spending and indebting entirely rests with the individual Govts, and politicians, who went on this socialist Kamakazi Mission

If Germany has blame to go around it once again rests with their moronic politicians and bankers yet again ruining (pissing away) their nations productivity and wealth creation on vacuous idealism (socialism). The heads of Merkels Party and the German Banks should be feathered and tarred

...ditto Greece, ditto Portugal, ditto Spain and ditto EVERY bankrupt European country

The Axe's picture

forget that TYLER...answer me this how can the VIX have a 11% move and the SP less then 1% me   the market is fucking broken

resurger's picture

Thanks to the Plunge Protection Team!

ill buy VXX before the Close, It's Bears Time


GeneMarchbanks's picture

'Debt is no cure for debt. What it can do is prevent a self-fuelling Fisher-style debt-deflation and it is clear that the LTRO has at least to some extent achieved that.'

God forbid debt deflation ever occurs meaningfully. It'd make the currencies somewhat credible again. I'm sure we can avoid the collapse that was brought about from the credit expansion but for some reason I'm not totally positive.

battle axe's picture

Italy, that car that you saw just skid out and wreck ahead of you is Greece and you are about to hit the same ice patch on the road, so watch out because here it comes.

alien-IQ's picture

and in a moment of unexpected sanity, the VIX is up 14% today.

alien-IQ's picture

make that +18%

and my one week old way out of the money calls are .02 away from being in the money.


resurger's picture



I think next week monday is going to be bad, what you think?

Am gonna load the truck with more VIX



fonzannoon's picture

Tough call. They have all weekend to make up great news.

walküre's picture

sold out. had a tight stop before EOD. fucker pulled back too much. back at it on Monday.

fonzannoon's picture

Get that dow loss under triple digits. Wow. Golf clap Ben. Golf Clap.

alien-IQ's picture

That's a tough call.

personally, I try not to hold positions over a weekend. So much can happen. I've woken to so many Monday morning nightmares. But of course, the opposite can also happen.

I find that being flat allows me to enjoy my weekends much more than holding positions.

But that's just me...

I wish you luck whichever way you choose to go.

resurger's picture

Yup! losses already , now the greeks have signed a second bail out deal... but its all good

Have a nice weekend AIQ & All



wandstrasse's picture

there is a reason why executives lie: the alternative would be worse.

slewie the pi-rat's picture

i'm gonna start a canary business!

LMAO's picture

Excellent idea, the mining business is booming.

Piranhanoia's picture

Fools,  we are not broke, you are.  We are completely insolvent, yes,  you keep taking our money out of your accounts before we can steal it. We will fix this, give us a very long time. It is you that should be embarrassed that the banks are without zee money, not us.  You will suffer, and we will do fine.  

Amazing what happens when you cut through the syntax and leave in only what you can eat.

HD's picture

What would shock me at this point is finding that anyone involved in this historic ponzi is telling the truth about anything.

youngman's picture

Did you see that South Korea sold a bunch of bonds today....denominated in Swiss Franks....hmmmmmm

Yen Cross's picture

He's Italian! Come on FOLKS!

earleflorida's picture

funny how the euro was just fine a few years back, but,... they had the audacity [of hope] to encroach upon US$'s hegemony from the Arab's and fuck the whole thing up --- now that they've been slapped around a bit, and finally shown their place on the totem-pole, all will be fine and dandy, except for a non-greece wheel never greased - needing to be replaced and discarded 

to ashes do the phoenix rise, naught?  

Cunning Lingers's picture

As the Irish people have encountered, all irish bank debts were guaranteed by their government and losses were socialized.

The easing of the LTRO collateral rules means anything that carries value worth physical gold can be mortgaged for worthless digital money.


What u own becomes worth less, what u need becomes more expensive and taxes skyrocket.

To rub salt to wounds, government reported inflation is only 2%. Can u believe it?



Olympia's picture

Global Debt Crisis

The greatest private fraud of human history.
Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy "illness" threaten Democracy and the freedom of people?
By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total ...understand where this plan started just to bring all states at the same end ...understand how this type of plans are established...


AE911Truth's picture

We are all over the globe in the same fight.
Destroy the vampires!
With a Silver bullet.

Olympia's picture

If you liked the previous article, feel free to read this one as well: 

World War III - The First Private War in History


Those who won all battles shall lose the war.

Bilderberg Group and the crimes against humanity.


This is how things work in all countries. Whatever used to belong to their people, today it belongs to the multinational companies of the Club. People were betrayed by their given leaderships and they lost everything. Capitals and markets were handed to the Club bosses. If you understand what is going on in Greece, you can understand what is going on in Britain, France, and Germany etc..