The last month has seen a considerable amount of the post-LTRO gains in Italian and Spanish Sovereign and Financial credit markets (and stocks for the latter) given back. The stigma priced into LTRO-encumbered banks has also surged to post LTRO record wides - more than double its best levels now. This is hardly surprising - while the LTRO was nothing but a thinly-veiled QE printfest, it is the action that was taken with that newly printed money that has created dramatially more contagion risk and sovereign-financial dependence as an unintended consequence. The collosal (relative and absolute) size of the reach-around Sarkozy carry-trade buying in local sovereign debt for Italy and even more so Spain is highlighted dramatically in these 3 charts for BNP, most notably the increase in banks' holdings of sovereign debt compared to their share of Eurozone sovereign debt - i.e. the banks in Italy, and more so Spain, are hugely more exposed to their sovereign's performance and with Spain's massive budget cuts - a vicious cycle of austerity to growth-compression to credit-contraction to Greece (firewall or not) is leaking into their bond markets, even with an active ECB doing SMP although inflation-constrained from LTRO3 perhaps.
Italian and Spanish banks went on a buying spree...
In the three months to February there was a huge increase in Italian and Spanish banks’ holdings of sovereign debt. February data also showed a large rise in Portuguese banks’ holdings
But the scale of Spanish bank purchases is striking compared to the size of outstanding government debt...
[12]
Slovenia, Italy, Portugal and Slovakia also saw large increases in this context
And compared to Spain's share of Eurozone government debt, Spanish bank buying is incredible...
[13]
The increase in Spain is also exceptionally high in relation to its share of eurozone government debt. The reverse is true for Germany and France.