Back in the middle of March, when all was sunshine and unicorns in the post-LTRO world of recovery and another sustainable recovery, we were vociferous in our noting that nothing has been fixed and LTRO3 is not coming [7]. Sure enough, here we are a few weeks later and the encumbering stigma that we were the first to point out (and call Draghi out on) is now wider than at any time since the LTRO program began with the banks that took LTRO loans now trading wide of pre-LTRO levels (fully stigmatized despite all that extra liquidity). Today saw the Stigma spread between LTRO and non-LTRO banks jump its most in 2 months to over 160bps (its highest in almost six months). There is however a troubling conundrum facing the ECB. The banks that need another LTRO (or liquidity) no longer have performing collateral to pledge and other banks that would like liquidity will not take it since they now understand the encumbrance and stigma that is attached to that decision. The ECB is snookered (and so is it any wonder that Draghi is playing for time) and perhaps this is why we are seeing the EUR leak lower against the USD as markets anticipate some more direct monetization mandate-busting action by the ECB (shifting the Fed/ECB balance and implicitly the flow between the two that we have also pointed out as critical). Either way, there is no LTRO3 coming anytime soon and together with this morning's jumps in liquidity funding costs [8], the vicious circles are ramping up again in Europe.
The LTRO Stigma jumped the most in over two months today (lower pane) and reaches up to near six-month highs - almost entirely removing any LTRO benefit completely...money well spent it seems...
[9]
And LTRO-encumbered banks are at their widest since LTRO began - while those that chose the tougher path of self-reliance remain considerably better rated by the market...
Our LTRO Stigma has proved to be one of the clearest ways to show the stress in Europe as we echo our thoughts from 2 months ago:
When one understands that the heart of Europe's problem is the rapid "vaporization" of all money good assets, everything falls into place: from the ECB's response, to Europe's propensity for infinite rehypothecation, to the rapidly deteriorating financial system.
Only this time there can be no quick collateral-type response as money-good assets are few and far between. We suspect it won't be long before the Fed comes to their rescue with extensions of the FX swap lines - but just how much of that ECB balance sheet does the Fed really want to take on as collateral when it is also nothing more than a giant CDO balanced on the dross assets of Europe's banking system (especially when one considers that ECB margin calls remain negligible in the face of asset impairments everywhere).