As we pointed out on Friday, there is a clear stigma being priced into LTRO-encumbered European banks relative to non-LTRO-encumbered (due to many aspects but most notably the implicit subordination of senior unsecured debt via collateralized loans to the ECB). Today that stigma, proving as we said that Draghi is simply incorrect, continues to grow as there is a dramatic preference for non-LTRO names in today's modest post-Greece's gun-to-my-head decision relative to a very modest improvement in LTRO-accepting names. As this performance gap increases we suspect it increases the probability that LTRO II will be a disappointment in terms of size and the implicit derisking that could encourage.
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Credit spread of non-LTRO-encumbered banks (green) has rallied (tightened) today in the risk rally while after both leaking wider most of last week, LTRO-encumbered banks (red) have rallied very little. The growing divergence raises red flags all over the place as we suspect the red LTRO banks will be increasingly stuck as capital markets will remain shut to them therefore forcing them to borrow more from the already addicted-to LTRO in order to maintain liquidity but will implicity be damaging their solvency.
Chart: Bloomberg