What Carry Trade? Euro Banks Deposit Entire LTRO 2 At ECB, Bring Total To Over $1 Trillion

Tyler Durden's picture

When explaining the practical effect of Wednesday's second and certainly not last LTRO, we said that "when it comes to explaining why Europe's banks are not only not deleveraging but increasing leverage while paying an incremental 75 bps on up to €700 billion in deposits soon to be handed over to the ECB, one needs all the favorable spin one can muster." We also estimated that net of rollovers and other tangents, the true net liquidity add would be €311 billion and "the final number by which the ECB's deposit account will increase will be about €210 billion less than the overhead number" of €529.5 billion. Sure enough, as of this morning, which takes into account the full settlement and allocation of the second LTRO cash installment, the ECB's deposit facility has soared by precisely as expected, rising by €302 billion overnight to an all time record of €777 billion, or just over $1 trillion. In other words, Europe has now successfully managed to fool everyone that it is executing the carry trade, when it is doing nothing like that at all, and it continues to park record amounts of cash with the ECB on which not only is it not earning a carry spread, but it is losing 75 basis points as it is paid a meager 0.25% for a deposit that cost it 1.00%. Said otherwise, instead of building a cash position and retaining earnings to fund €3 trillion in debt rollovers over the next three years (by the time the LTRO matures incidentally - good luck paying down that additional €1 trillion, which makes it a total of €4 trillion in maturing debt), roughly 800 European banks will bleed by €6 billion in the next year just to store their cash with the ECB. So much for promises of the carry trade. And we certainly commiserate with all those who bought European bonds on the assumption that they were frontrunning banks who are buying up BTPs, Bonos and what not. They were only frontrunning themselves.

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GeneMarchbanks's picture

Smoke & mirrors is all that's left. The Euro banks are living in a parallel universe of their own making and anybody 'frontrunning' their supposed plans is an idiot.

GetZeeGold's picture



I don't think the heavy stuff is going to come down for quite a while.


Some do's and don'ts for the brave new Euroland.





economics1996's picture

I thought banks were supposed to lend money to people?

sessinpo's picture

Um, banks like any other corporation are supposed to make profits.


Lending money to people is so passe. Get with the times dude. Are you still on an Iphone 2 or something? It's much easier to create derivatives that are unregulated and control the body which determines when such derivatives pay out (ISDA). sarc


Why deal with those insignificant little people with loans of thousands to several million when you can create a multi-trillion dollar market in derivatives?



Croatian Patriot's picture
I do not believe. All the money has gone directly into the economy. :) LOL
I will continue to collect physical!
firstdivision's picture

So when does the ECB starting buying US equities?

GetZeeGold's picture



It was yesterday actually....well.....announced anyway.



Ghordius's picture

nah, the ECB is not going to do something so crass as buying directly US equities. it lends against crappy collateral, that's refined. some of this crappy collateral just happens to be US equities, but hey, banks know better, don't they?

firstdivision's picture

Pfffsh!  Amateurs at the ECB don't seem to have after-hours access. 

disabledvet's picture

i'm printing up my "And all I got was this Government Program" t-shirt series as you write...

Nussi34's picture

777 the number of the beast!

GetZeeGold's picture



Missed it by just that much.



ivars's picture

I start to believe that this October chart is correctly showing the February peak in EUR/USD, principal trend. That means, that after little correction along time axis to match the 1,35 peak exactly (I will do it later when I am more sure) , there should be an event ( or nothing special) that would trigger sharp  EUR downslide in the END OF APRIL-early MAY ending in November/Early December 2012.


What could that event (or general increasing weakness in EURo area)  be?

tarsubil's picture

I did a little chart gazing and was thinking April/May would be a good time to buy PMs. You think the crap out of Euro will make dollar strong enough to knock down PMs one last time?

LongSoupLine's picture

Ponzi...on crack with a side shot of Irish whiskey.

fiddy pence haff pound's picture

bankers don't trust bankers.

That's the Lehman Identity, isn't it?

Since they can stash their money at the ECB, that means it's actually better than the Fed

when trust evaporates.

They_Live's picture

Like trying to get a handshake at a pickpockets' conference.

zilverreiger's picture


In other news, Netherlands can't live up to  it's own 3% of GDP lending rules, Hilarity ensues.

youngandhealthy's picture

ZH...you need to rethink ECB deposits and why money goes back to ECB. Its an accounting thing...you can draw no conclusion whatsover  where the money has been before it gets back to ECB. It doesnt mean it hasn't been lent to someone. U dont know.

mendigo's picture

from Bloomberg: “The increase merely reflects a balance sheet identity, with the increase in the ECB’s refinancing operations on the asset side of the Eurosystem’s balance sheet being necessarily reflected in banks’ holdings of liquidity on the liabilities side,” Draghi said. “The banks that have borrowed liquidity from the ECB are not the same as those that are using the deposit facility of the ECB.”

It sounds like the loaned money is held until needed? But that's not what he's saying. I think maybe he's greating his lies confused mayb the truth is better in this case.

taraxias's picture


I've been on here a while, visit just about every hour of the day,but find myself posting less and less.

ZH should reasses what it has evolved to, a financial news tabloid. You know you are in trouble when Business Insider is starting to have more credibility, and accuracy, than you.

Junk away.

GeneMarchbanks's picture

Yeah, because BI doesn't have a narrative bias? Don't embarass yourself, Joe is the tabloid.

taraxias's picture

Chill Gene.

There's a bearish bias on here, to start. But being a bear myself, I don't mind it. What I do mind is trash reporting like the oil pipeline explosion story that showed up here yesterday. I also mind the "like we wrote" arguments, when clearly a lot of the opinions posted by the Tylers can play both ways.

Are the Tylers now predicting more QE by the FED, or not. Your guess is as good as mine, but rest assured no matter which way it plays out, another "as we predicted" will appear. It gets trashy after a while.

ZH has a following on here, I'm one of them, but there's reason why a lot of the original great posters on here have all but disappeared. ZH needs to decide what's more important, hits on their website, or accurate commentary and reporting.

GeneMarchbanks's picture

A narrative bias is pervasive through-out and if you begin on that premise you're already way ahead of the game. Was there not a 'market' reaction to the pipeline story?

MachoMan's picture

That's an incorrect statement of the binary decision presented... 

The bigger issue is time.  Zerohedge's core competency is getting timely information, disseminating it, and getting it to customers...  In other words, by posting things like the pipeline issue, the whole point is simply to get the information out there as quickly as possible (not make editorial commentary).  This is the predominant policy, not making an investigative journalism site...  although, that too is posted, albeit oft with the elbow grease of others.

I strongly suspect that as support for traditional media wanes, sites like zh stand to gain an incredible amount of goodwill and market share by doing as you suggest and sacrificing timing for "accurate commentary and reporting."  But, that's on down the road...

Aside from the fact that, by and large, the vast majority of posts are accurate...  despite having little time if any to edit... 

mick_richfield's picture

Oh, I won't just junk you, you Greek gangsta.  I'd rather ask which Business Insider articles seem more credible than this ZH nonsense to you.

  Here's why we should all be 'Relaxed and Optimistic' about the Economy ?

  Geithner: Even My Wife Can't Believe You're Complaining About Financial Regulation

 The Biggest China Bull in the World explains why a Hard Landing Doesn't Scare Him

Is that a fair sample?

Rubicon's picture

Farage is going to punch someone!

GetZeeGold's picture



Farage needs to punch everyone......if you don't want some......get out of the room.



noses's picture

"Nobody cares for that slimy opportunistic British separatist anyway so why should anyone be afraid?"

Rubicon's picture

Speak for yourself Big Nose.

GeneMarchbanks's picture

He's correct on all fronts.

Ooter's picture

As young and healthy said, its a closed system. Consider examples:

Bank A buys Italian bonds from Fund X, Fund X places the money with his bank, his bank places the money with the ECB.

Bank A buys Italian bonds from Fund X, Fund X places the money with his bank, his bank lends the money out to Business Z, Business Z buys equipment from Manufacturer Q, Manufacturer Q places the money with his bank, his bank places money at ECB.

The money always ends up with the ECB save for cash balances being run by national governments at their central bank current account.

Tyler Durden's picture

So LTRO money, unlike all other money, is some "magical" money that has infinite velocity, and has expanded the ECB deposit window by precisely the net amount of LTROs issued, even as the money has been used in an infinity of other applications in the meantime? Yet somehow that is not true for the hundreds of billions in other fungible cash used by European banks which proceed to rehypothecate and repo out all their assets as is?

Is that about right?

noses's picture

As far as I understood it this is the ECB's revenge for not being able to leverage the ESM tenfold or higher. Cycle the same breadcrumbs through the system again and again and you get an entire loaf of bread by adding them up without looking like a bad guy for actually printing the stuff. At least to the unwashed masses who are going to pay for it in the end.

firstdivision's picture

Funny that this closed system doesn't follow Noether's Theorem in that it lacks any conservation laws.  No system is closed when things can be created out of thin air. 

Tekrunner's picture

I'm pretty sure you have it (at least partially) wrong too. This is central bank money, which banks are supposed to use for :

  1. reserve requirements when lending bank money
  2. buying government bonds on the primary market
  3. settling inter-bank balances

None of these things can absorb 300+ billions instantly (and 3. is even supposed to be 0 sum, though not really when banks don't trust each other). So it makes sense that a large part of the LTRO is first deposited back. What matters is how the deposit facility usage evolves from now. To me the jump itself is non-news.

cnhedge's picture

but the cash stored with the ecb is not all the cash handed down with ltro.


Reese Bobby's picture

Never mind.  Good comments.

mick_richfield's picture

I keep telling myself -- "Don't underestimate the enemy.  Never assume that he is stupid.  If he does something that seems idiotic on the face of it, then you're not seeing the whole picture.  Assume that he knows something you don't and figure out what that must be."

But -- damn.  It's getting harder to hold onto that attitude.

noses's picture

So they are lending money at 1% to store it at 0.25% at the ECB? Don't they have their own computes to do the math?

youngandhealthy's picture

The amounts allotted in the LTROs to the banking system mechanically increased the quantity of base money in circulation and will therefore be reflected, at the aggregate level, in either the current accounts of banks or recourse to the deposit facility, irrespective of the use that individual banks make of the newly available liquidity. If a bank buys government bonds in the primary market, the amount will also show up as bank deposits at the ECB if the government spends the receipts or places them at a private bank. Only if the amount received by the government is placed on the government’s account in the central bank will it not show up as bank deposits at the ECB.

Now, will it end up in the "economy"? Well then the Wonger shows up in the Lending Surveys.

GeneMarchbanks's picture

'Now, will it end up in the "economy"?'

If it's a 'closed system', where along the line can it 'leak' over into the "economy"?

noses's picture

I've seen that kind of leaking when a supposedly closed system chemo toilet ran over. It hit the entire economy class with its effect.

dvsteenk's picture

So, do I correctly summarize the elements forwarded by by youngandhealthy, Ooter and Tyler: there is an internal carry trade going on with the new money that was put in circulation, i.e. the money created from the new LTRO?

Thus, the 800 banks are not simply depositing it back at 0.25% while paying 1%, that would make no sense whatsoever - no, in the meantime, the money changes hands in the fractional reserve system. So, even if the amount that is put back with ECB is about the same as issued LTRO, it has been leveraged and funneled into all types of risky assets giving at least a 1% return. Even the banks depositing back at the ECB earn on top of the 0.25%

Conclusion: more money circulating, more free money for the banks to pump up the markets and hide their risk and debt

sudzee's picture

And the European bank run continues. Public money replacing private deposits that have been levered 50-100 times.  Every 10 billionl out needs to be replaced with 500 billion newly printed fiats. No possible way to stop the debt spiral. 300 billion, then 500 billion , then 2 trillion, 50 trillion. Eventually private citizens must get some of the printed money to pay interest. This is Weimar in the making.

AnAnonymous's picture

They were only frontrunning themselves.

That is good. That is what happens when you have to downsize to maintain profits, you end with wearing multiple caps that do not match.

NEOSERF's picture

Yikes, at best given their slightly contracting PMIs, this thing is "stabilized" but without any real growth to speak of, they (and the US) are just treading water until the next downturn hits...and the downturn would come either through inflation eating into margins and making corporate officer sentiment lower based on foreknowledge of poorer results going forward, which would have them either proactively laying off as we have been seeing or suspending hiring...we will see

Scalaris's picture



If a bank uses money from the LTRO to buy government bonds (or any other paper) in the secondary market, the amount will still show up as a deposit at the ECB (now on behalf of the seller’s bank).

If a bank buys government bonds in the primary market, the amount will also show up as bank deposits at the ECB if the government spends the receipts or places them at a private bank.

Thus, the increase in deposits does not imply that the 36 months LTRO has failed to stimulate government bond purchases (or other trading for that matter).

Only if the amount received by the government is placed on the government’s account in the central bank will it not show up as bank deposits at the ECB (autonomous liquidity factors would then be increased instead, which happened to some extent in the last few weeks of 2011).

So, if governments undertake substantial frontloading of their bond issuances, we should expect to see a decline in deposits.


Courtesy of Danske Bank (via FT Alphaville)

loveyajimbo's picture

Just like the US... the printing does nothing to stimulate lending, as was supposedly intended... one would think the geniuses would attach a requirement that all funds taken must be loaned out within a certain period or returned with penalties... however, if the intention was to print funny money, hand it to the banksters to buy bonds that no one else will... then it works great.