Now that every morning the US market is once again in full on European debt issuance stress mode, it makes sense to see just when the real stress will hit the tape, or in other words, how long until the LTRO money fully runs out. Remember that the latest contraption in the European ponzi, the LTRO, took worthless collateral from European banks, and flooded them with fresh money good cash so they could use this cash to buy their own sovereign debt, and specifically to prefund the hundreds of billions in 2012 issuance net of debt maturities. So how does the math work out? Deutsche Bank summarizes the unpleasant picture.
Although exact figures are not yet available, we are able to deduce that from the two 3yr LTRO’s combined, Italian and Spanish banks would have had about €104bn and €54bn to utilise in carry trades (net of re-financing). Between Dec 2011 and Feb 2012, Italian banks purchased €43bn of domestic bonds and Spanish banks €61bn. We can see here that Italy still has €61bn of LTRO headroom left while Spain has already surpassed their allotment by about €7bn.
If we take these figures and compare them to the expected sovereign issuance over the rest of 2012, we start to gain a clear picture of potential pressures during the year. Spain has completed €40.5bn out of the estimated €86bn in issuances so far with €45bn expected in redemptions, leaving them essentially flat for the year. Italy on the other hand has completed €74bn out of the estimated €232bn in issuances so far with €128bn in expected redemptions, leaving a net issuance headroom of €30bn. Our rates guys therefore conclude, that in general, Italian banks are better situated to support their domestic bond market this year than the Spanish banks are.
So while both Spain and Italy are likely literally on the edge when it comes to net issuance and demand dry powder, there is one very big risk:
Clearly one risk is that non-domestic bank holdings decline further
offsetting any domestic bank buying. Interestingly the external holding
of government debt in Spain and Italy has declined to 30% and 37%
respectively. For both countries this was at 45% level in 2010.
Translated: selling. Indeed, if despite everything Europe has done, plain old vanilla selling resumes, the LTRO cash will go poof. Which brings us full circle: has the market regained faith and trust in the CDS market after ISDA's trickery in 2011? If the answer is yes, bond vigilantes may just buy CDS instead of selling bonds. If the answer is not, Europe's period of recovery is now effectively over, as any incremental selling will result in a vicious cycle whereby the full benefit of the LTRO will have been not only exhausted, but more LTRO will be demanded just to keep up with net issuance! And that assumes not additional selling as a result of that.
Sadly, ponzi schemes always end up being all too transparent, and never end well. This one will be no exception to the rule.