From mid-March, the difference in credit risk between banks that took LTRO loans and banks that decided not to become stigmatized and subordinate their existing senior unsecured bond holders has now more than doubled. Another day of decompression today has pushed the so-called LTRO-Stigma to 142bps - its widest in 5 months and worse than at any time since LTRO1 was undertaken. Since we first noted the disingenuous commentary by Draghi [5] on 'there is no stigma' and suggested this trade on the back of the early recognition of the implicit subordination and unintended consequence of self-loading and self-referencing banks buying their own sovereign debt locking them into a vicious circle with one another, the spread has more than doubled (meaning anyone who TRS'd this deal likely would have seen this spread doubling result in a doubling of P&L) and reflects very closely the market's movements during the crisis period heading into the announcement of the new fiscal compact and the LTRO scheme. This time around, there is less collateral and a banking sector that knows what it means to shake hands with the devil.
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Chart: Bloomberg