Why ECB's LTRO Won't Stop Collateral Contagion

Tyler Durden's picture

Via Gordon T Long of GordonTLong.com,

How long can the European media keep the EU credit implosion a secret? The disgraced former IMF Director, Demonic Strauss Kahn said on Tuesday December 12th, 2011 that No 'Firewall' Exists and Europe Has 'Only Weeks'.  Of course within minutes of this Financial Times news release which detailed his vent on EU leadership and the perilous situation in Europe, the article disappeared.

The details of the European liquidity crisis are generally reported, but for some reason no media source wants to pull the pieces together so everyone can see the magnitude and futility of the crisis. A growing Collateral Contagion is being shrouded in the apparent belief that the solution to the European Financial and Banking crisis is a grand change in Treaty governance.  Obviously the European Central Bank (ECB) was well aware of the reality, when it was forced to deploy a historic and unprecedented LTRO (Long Term Purchase Operations) on Wednesday December 21, 2011.  560 banks desperately and immediately grabbed what they could, to the tune of €489B.

The LTRO bought the EU private banks some time. It did nothing to solve the EU Sovereign Debt Crisis. After less than one week, the cash held at the ECB surged €133B to a new record €347B. Since the net LTRO was only €210B, it tells you that the EU banks not only have a cash problem, but more specifically, as ECB President Mario Draghi says : "hoarding at the ECB signals that the problem afflicting the Eurozone is not so much about the amount of liquidity but that this liquidity is not circulating around the region's banks".

I would argue that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king. It is clear that the rampant advancing Collateral Contagion will quickly eat this futile attempt like ravenous wolves.  A well circulated Tweet from PIMCO bond king Bill Gross said it all: " What does LTRO stand for? 1- A shell game; 2-Cash for trash; 3 Three-card Monti; or 4. All of the above."

Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can".


1.     COLLATERAL CONTAGION: There is a cascading Collateral Contagion crisis in which secured lending, based on sound assets, has replaced unsecured lending based on future expected cash flows.

2.     WHOLESALE LENDING: Wholesale bank lending, which is a unique cornerstone of European banking, has completely frozen since the failure of Dexia and US Money Market Funds will no longer risk short term capital having learned their lesson in 2008.

3.     BANK RUNS: Bank Runs are quietly and insidiously occurring throughout the peripheral EU countries as corporate and private depositors seek safe havens for their cash holdings.

4.     SHADOW BANKING SYSTEM: The European Shadow Banking System off balance sheet and unreported leverage structures, such as SIV (Structured Investment Vehicles) is collapsing due to non performing loans which must finally be rolled nearly 3 years since the financial crisis began.

5.     GLOBAL INVESTORS PULLING SOVEREIGN EU INVESTMENTS: Net outflows from the euro-zone’s financial account reached €32.1 billion in October alone, on an unadjusted basis. The drop reflects the sale by foreign investors of €53.3 billion in euro-zone debt instruments and €6.6 billion in equities.

6.     INTERBANK LENDING: Prior to LTRO, overnight interbank lending was impaired as LIBOR, LIBOR-OIS and TED spread yields were going almost straight up on a percentage change basis.

7.     INVERTED YIELD CURVES: Prior to LTRO, yield curves in the EU peripheral countries were either inverted or nearing inversion prior to LTRO.

8.     US DOLLAR SWAPS: A shortage of US dollar denominated loans forced the US federal Reserve and other global central banks to intervene and offer what is turning out to be unlimited US dollar SWAPs for minimal interest rates and unprecedented, extended durations, not previously considered.

9.     SOVEREIGN BOND MARKET: The EU Sovereign Bond Market is being avoided by almost all Global financial institutions. The only participant are Central Banks desperate to buy more time until confidence is restored.

10.  GERMAN BUND SCARE: You cannot have a currency without a risk free bond. The German Bund had become a proxy for this, but recently even the Bund has come under pressure as selling escalated in a flight from Europe.

11.  YEN CARRY TRADE: The YEN Carry Trade which has been a major financing source for the EU, even prior to its inception, is being forced to unwind due to a significantly weakening Euro and the threat of a serious drop.

12.  BASEL BOX: The Tier 1 Core Capital requirements have forced many banks to actually shrink lending to meet requirements. A significant withdrawal from lending in Central and Eastern Europe and many Emerging countries is now clearly seen as a direct result.

13.  CREDIT DOWNGRADE ONSLAUGHT: S&P placed the long-term sovereign-debt ratings of 15 euro-zone nations, including struggling Italy and Spain, on negative watch. That typically means there is at least a 50% chance of a downgrade within 90 days. France is likely to soon lose its coveted AAA rating, which will impact the European Financial Stability Fund (EFSF) borrowing costs.


The list is even longer, but it will need to suffice for this shorter article.

The above issues suggest, minimally, an immediate  €4-8 Trillion EU problem.

The EU has no ability to solve this problem short of simply printing Euros, which unlike the US Federal Reserve, Bank of England and Bank of Japan, the ECB presently (I stress presently) refuses to do.

Let's briefly discuss a few of these so we can appreciate the seriousness of the EU problem and what lays behind a first half 2011 surge of $107 TRILLION in derivative SWAPS.


The rest of the interesting and unusually complete article can be found here:

Article Collateral Contagion

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Manthong's picture

At least that little Greece thing is taken care of.

johnu78's picture

Oh really? And how is that?!?!?!?!




Manthong's picture

Gee, I figure they must have fixed it … seems nobody is complaining about the forced 50% loss of capitol on billions of sovereign debt, that it has not become a credit event, and there is absolutely no news of discontent over there as we enjoy the  holidays.. so no news is good news , right?

trav7777's picture

Anybody still have any questions about how a creditmoney system can't function in the face of contraction?

Or are we gonna continue to play this charade that growth is just around the corner?  You either PRINT to pay the coupon or the creditmoney system COLLAPSES almost overnight.

Quinvarius's picture

They will print, as they have been printing, at an accelerating rate.  The system will first try to save itself at the expense of everything else.  It takes an outsde force to make it stop.  But the system has too much influence to allow that.  Just when you think hyper inflation might not happen, that is when it will realy kick in.

As always, this is a good time to buy gold.  LOL.  Every day is.  The idea is not new or fresh.  It is not exciting.  There is no way to outsmart it.  It just is what it is.

Irish66's picture

4-8 trillion, spread can really be played.

I'll take 7.2 trillion Alex

francis_sawyer's picture

for some reason no media source wants to pull the pieces together so everyone can see the magnitude and futility of the crisis

No wait... You're KIDDING me... Get right out of town! I thought THE MEDIA were on our side!

Sudden Debt's picture

Main stream might not but i know some magazines who nail the crisis pretty good. To bad joe and jane don't read that stuff... No cartoon section and all...

wandstrasse's picture

When I read 'magzine' and 'nail' I suffered a shock-second.. but at second glance I was calm again.

ArgentoFisico's picture

Rumors say that President Napolitano told the newspapers and TV news back in september not to talk about a return to the Lira nor invite anybody to talk about it. So in Italy the average Giorgio doesn't even think it possible to exit the euro... never heard a word about it!

bank guy in Brussels's picture

European bond-buying in earnest beginning soon.

The can will be kicked a few more months yet.

The nature of gub'mint

Is that the EU will print.

philipat's picture

Why is nobody calling out LTRO for the QE that it truly is? It might be that it would contravene the German Constitution and require approval by their Parliament and people? Ot perhaps it might be connected with the price of Gold?

Either way, on the one hand it isn't solving the problem, as evidenced by the return of the cash to the ECB, and the EUR has strengthened since the first round of this stealth QE was launched.

None of this makes any sense to me. Am I missing something or is this yet another illustration of the markets being totally broken?

SWRichmond's picture

LTRO is simple to understand.  We are experiencing a deleveraging, and LTRO is an attempt to re-introduce leverage into the system.  In other words, it is an attempt at a substitute for outright printing.  It is meant to soften the blow of the deleveraging event.  It was all they could come up with.  As Bill Gross points out, it is a massive joke.

GeneMarchbanks's picture

'The EU has no ability to solve this problem short of simply printing Euros, which unlike the US Federal Reserve, Bank of England and Bank of Japan, the ECB presently (I stress presently) refuses to do.'

Clever. You almost had us there. We'll wait until Shalom prints for us. I mean, they're already doin' it over there so what's the big deal?

wandstrasse's picture

Does this mean the financial system is NOT sound and stable?? But but they wear ties and have university degrees.. I am sure they will fix it when they discover any flaws.

Stax Edwards's picture

I believe 'unsafe and unsound' is the official terminology

Pretorian's picture

It will help. If the wolf's want to leave EU pigs alone, interest rates drop, everyone blind again and so the story goes like in the past 50 years. It is all up to the wolfs created by US FED itself. If other countries have attempted similar financial "Wolf's" entity  they will be bombed in 24 hours under excuse they jeopardize world order.

css1971's picture

I thought they were half way there already.

Sudden Debt's picture

I still remember the eu bank problem was 1 to 3 trillions... It was the year of our lord 2011...

trav7777's picture

the scope of problems is the only thing still growing in this economy

asteroids's picture

As I've been saying for months. Too much credit, too much debt. and not enough dollars and an insane amount of CDO's. Adding credit to the system won't help. The only way out is to outlaw CDO's first. then reduce credit and finally the debt. Nah, it'll never happen.

wandstrasse's picture

Sir/Madam, may I kindly remark that your time machine brought you into 2011. The CDO=toxic crap - analysis was appropriate between circa 2007 and 2009.

endicott glacier's picture

They need to open a department of "can kicking" in all graduate economics porgrams

Stax Edwards's picture

I believe there are Ivy League schools currently working with the Eurocrats to help create the curriculum

wandstrasse's picture

can-kicking and procrastination were my top two disciplines at the university!

Cheesy Bastard's picture

I majored in can emptying.  Procrastination came naturally.

High Plains Drifter's picture

from reading that report i would have to say,  i don't see how they can continue kicking the can down the road much longer.   maybe old dsk is right. they only have a few weeks more of existence............

Ropingdown's picture

Can-kicking HAS been the curriculum for 40+ years.  That's why it comes so naturally to our top people.  Indeed, that's why they are our top people.  Somebody's got to pay the piper?  Nope.  The old folks have decided that they're going to be dead before the bill comes due.  What about the kids the piper led away as hostages? "ach! keep 'em. We're buzy playin' shuffleboard and smokin' that medical cannabis!"

HardlyZero's picture

Can Kicking = Modern Finance for all business and government entities.

Which leads to Goldman Sacks and JPM.

Which leads to infinite debt spirals, debt traps, and banksterism.

Which leads to MF Global.

Throw in some computers and math and you have modern Wall Street.

ex VRWC's picture

 - The EU has no ability to solve this problem short of simply printing Euros, which unlike the US Federal Reserve, Bank of England and Bank of Japan, the ECB presently (I stress presently) refuses to do.

These things always end with the same conclusion - the ECB must print.  Germany gets demonized - the Eurocrats are all called 'short sighted' because they wont print.  There is just one unfortunate fact - printing is not a solution to anything.  There is a reason they don't do it.  

This is my latest video and song, an attempt to make it clear to even Joe-six pack the evils of ZIRP.  

The ZIRP Song

Stax Edwards's picture


That video was great!

ex VRWC's picture

Share it - my channel needs exposure!  You could almost call it 'Zero Hedge in song'.  I think most here would agree with what is expressed in the songs and videos there!  Definitely an apolitical viewpoint - I don't want it to be pigeonholed as a typical left ( or right ) leaning protest music.  I just want to speak the truth.

john39's picture

good idea...  tired of being called a communist by Fox viewer types because I object to bailouts of big banks...

ex VRWC's picture

Here is the chorus of a song I have planned for production that addresses the lack of critical thinking on all sides:

Talking points, talking points
All I'm hearing are your talking points, talking points
Can you think outside the tiny box
Of your ideology? 

Talking points, talking points
All I'm hearing are your talking points, talking points
All your thoughts are just hand-me-downs
From your ideocracy


Al Huxley's picture

It's not that printing Euros will solve the problem, its simply that it's the last available option to give the can one more kick down the road, and keep the banks alive for a little bit longer. And it's been demonstrated time and time again that - if there's a way to kick the can down the road, then politicians will do it - banks will be kept alive by any means possible They'll print Euros, because othe therwise nobody can buy PIIGS debt, and the only option is to have Greece, Italy, etc. fail, and it's not that the establishment gives a shit about Italy, Greece, etc..., but if they fail, then that means the European banks fail, and THAT won't be allowed.


By the way, great video, and spot on - we'll all pay in food, gas, whatever we really need, to keep the ponzi alive. But that's the way the system was designed.

ex VRWC's picture

Thanks.  I have contributors who record the songs and make the videos, and they do a great job.  I agree that any can kick will be undertaken.  I am just trying to do my part so people might at least recognize it for what it is and make connections they miss or don't understand.  A 3 minute song can do that.

Optimusprime's picture

Terrific work!  Keep it up!

blindman's picture

that is great ! make your own music
with the right lyrics that reflect the
real situation we have here. thanks
e.v. .

ex VRWC's picture

Hey Blindman!  Yeah as you know I have been plodding along getting these out for a while now.  I have found cost effective ways to get the music done and to get videos produced.  I have 4 songs on the channel now, with more in production, so we will be at this a while!  I have settled on a style that is not too dark, with a touch of humor but uncompromising and very clear lyrically, so you don't need to interpret much to get the message.  I do not want the songs to be able to be twisted by the righties or the lefties - I want them to be clear, and speak the truth we all can see around us.

I tried this line of discussion with my Dad.  I said "You know there have been massive bailouts and printing, right?  Where is the money?  Do you have any of it?  Does anyone you know have any of it?  Where did it go?  I'll tell you where it is - it is chasing the markets and bidding up the price of your gas and food and lining crony banker's pockets.  And the only solution the politicians and bankers have is to pour more money in and create more debt that cannot be paid. The new money won't reach you either".  

I know thats an oversimplification, but it gets the point across, and thats what the song says, too, in so many words.

Irish66's picture

Thank you..great song

TheSilverJournal's picture


A ponzi is a scam which pays early investors out of the investments of later investors. In a sense, the world’s monetary system is one giant fiat ponzi scheme with the only question being when will the ponzi end, not if it will end.

The problem is growth is no longer able to keep up with the malinvestments caused by cheap money (0% rates + QE). Either cheaper money is increasingly provided in order to cover up the malinvestment (more QE, or purchasing of MBS, or printing money to purchase anything), or the malinvestments become exposed.

Allowing the malinvestments to become exposed is politically unfeasible, so cheaper money will be provided in order to keep the malinvestments hidden. In a sense, the new investor is the newly created currency..once the new currency stops or even slows, the ponzi fails, but keep the new currency coming in faster and faster and hyperinflation is the end result.


trav7777's picture



I don't know what it will take to get you ostrichlike fools to accept what the symptoms are telling you.

It's ALL OVER, everything you know is at an end.  Life as we know it is over until and unless we find a new growable energy supply (like fusion).

Period.  Stop fighting the truth.  I marvel that people who can come far enough to see that the financial system is a scam cannot go beyond that to accept that the whole entire GROWTH system was inevitably going to peak and inflect.  it HAD to happen.  Now is just when it DID happen.

buzlightening's picture

Ezero coined by ZH says it all.  Who didn't know it would blow up as all fiat money does. Reaching it's intrinsic value.  The Ezero to the USDinker dollars is racing to zero.  Twin towers of financial illusion burning to ashes and not a damn thing the PTB can do about it except keep the noose of citizenry circling in from choking the foul urchins to death.

Bullwinkle Moose's picture

The only thing that gives fiat currency value is the guarantee that it will remain scarce. Governments around the world are racing to make their currencies as common as grains of sand.

andrewp111's picture

Wrong.  The only thing that gives Fiat currency value is the fact that you must have it to pay your taxes. Scarcity is a related, but side issue. It doesn't matter if the Government prints a trillion trillion dollars if most of it is locked up in bank reserves. What matters is the amount of cash in actual circulation and how high the taxes are. If you don't get enough  $  to pay what you owe the Governments (Federal, State, and Local), you go to prison or lose all your property.

BennyBoy's picture

Too Big To Fail

Too Big To Nail

Too Big To Jail

Too Big To Hail