Despite the easing of collateral standards, ECB Margin Calls surged last week by their most in over 9 months (ex-Greece). As yields rose (and prices fell) pre-summit, so the collateral that European banks have lodged with the ECB fell in value and thus, the banks had to find cash to cover those margin calls. The rally from Friday may have eased that strain a little but today's give-back of all those gains (and in fact to a worse level) suggests that these margin calls will continue to rise and put further liquidity stress on cash-strapped European banks. Most critically, the ECB (while extending some of its collateral) reduced banks' ability to self-reference and post ponzi-bonds as collateral (i.e. a Spanish bank cannot get a government guaranteed issue off and then turn round and pledge it with the ECB). Between negative Swiss interest rates (and Denmark), stressed basis-swaps, and now rising ECB margin calls, things are going from bad to worse behind the scenes in Europe - no matter what reflexive perspective an equity market rally is telling you.
ECB Margin Calls have surged by the most since September this week (the large rise and fall in March is the Greek restructuring).
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and at the same time liquidity stress is breaking down rapidly...
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We wonder if this is the entire purpose of the panic levels at the EU Summit as without the ECB reducing its margin rules dramatically (which would be a NEIN from the Germans), we appear to have hit the limit on asset values for collateral.
This is yet another unintended consequence of the LTROs by which the most stressed banks used more of LTRO and pledged more of their government's debt with the ECB which is now stressed itself and implies a need for more cash to cover those shortfalls from the most-stressed banks...
Chart: Bloomberg