Six weeks ago when we first [3] brought the idea of a 'stigma' for accepting LTRO loans, the difference between credit spreads of unencumbered banks and encumbered banks was a mere 50bps. Today it has soared higher to post-LTRO record wides at 100bps as LTRO-facing increasingly-encumbered and increasingly-subordinated senior unsecured credit spreads blow out to near mid-February wides. It was mid-February when we called out Draghi for lying [4] about the 'stigma' - perhaps now the market is realizing he was not telling the truth, the whole truth, and nothing but the truth as all the benefits of the LTRO (fixing short-term liquidity issues for the critical banking system) start to unwind. Whether it is margin calls from the ECB on falling asset prices or rising cost of funds from a market-wide recognition of the massive subordination that just occurred (and will only get worse), we suspect the primary issuance market for EU banks (especially those who took the loans) will be closed (or hugely expensive) for a long time to come.
[5]
Charts: Bloomberg