Frontrunning: Leap Year Edition

  • Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash (Bloomberg)
  • Papademos Gets Backing for $4.3B of Cuts (Bloomberg)
  • China February Bank Lending Remains Weak (Reuters)
  • Romney Regains Momentum (WSJ)
  • Shanghai Raises Minimum Wage 13% as China Seeks to Boost Demand (Bloomberg)
  • Fiscal Stability Key To Economic Competitiveness - SNB's Jordan (WSJ)
  • Bank's Tucker Says Cannot Relax Bank Requirements (Reuters)
  • Life as a Landlord (NYT)

2012 - The Year Of Living Dangerously

...European banks are three times larger than the European sovereigns, the ECB is not the Federal Reserve Bank of the United States, the leading economy in Europe, Germany, is 22% of the economy of America, that there are ever and always consequences for providing free money, that Europe is in a recession and it will be much deeper than thought by many in my view, that the demanded austerity measures are unquestionably worsening the recession and increasing unemployment, that nations become much more self-centered when their economies are contracting and that the more protracted all of this is; the more pronounced Newton’s reaction will be when the pendulum reverses course.

The Final LTRO Preview - Bottoms Up

There is broad disagreement among European banks on whether they should (and whether they will) choose to access the LTRO. We have discussed the top-down perspective and the very granular bank-by-bank perspective, and we end with a more bottoms-up perspective on the bank's own views of the LTRO. As SocGen notes, the investment banks (and certain Swedish banks) are very skeptical (and rightly so given the 'LTRO Stigma') while the Italian and Spanish are open to taking whatever they can, whenever they can (is that really a good sign?). Bank management must weigh the transparency they will face at the end of the quarter when sovereign bond holdings are exposed and just as SocGen points out, banks with considerably higher exposure (implicitly through the carry trade) may well face much more negative market action (even if Basel III doesn't handicap that risk). As with LTRO 1, the ECB will only reveal aggregate data, leaving the individual banks themselves to reveal their own take-up - we suspect the investment banks will make a point of highlighting that they did not take the funds, while the Portuguese, Italian, and Spanish banks will promote the benefits of their government-reach-around self-immolating ECB life-line.

Unsuccessful Irish Referendum Would Prevent A Future ESM-Funded Bailout

While the now scheduled Irish referendum on the fiscal treaty, which will likely not pass successfully absent major concessions on behalf of Europe, will not precipitate a failure of the recently agree upon compact, as 12 out of the 17 contracting parties need to support the Eurozone, it will have an impact in that it would impact future bailouts of Ireland courtesy of preset European bailout mechanisms. In other words, should things take a turn for the worse, and they will, in the near future, Ireland will have to rely on itself to save itself. As a reminder, it took Europe 2 years to (supposedly) firewall itself from default and a collapse of its banks. How long will the same take for Ireland, because while the country may be standalone, its banks most certainly will not be. Remember that money is fungible. So are massive unrecognized Mark to Market losses. Morgan Stanley explains.

Ireland Mentions "R" Word, EUR Plunges

Just as we scripted, the temptation to migrate from the status quo in Europe was just too high for the other peripherals and Ireland just gained first / next mover advantage by daring top mention the "R" word. As Bloomberg notes:


We would imagine that Barroso and his pals are scrambling now that another 'Referendum' is on the cards (and we are checking what 'referendum' is in Portuguese) and while fascism in perpetuity has been priced into Euro, the possibility that democracy rears its ugly head has just sent the EURUSD tumbling.

ilene's picture

Priced for Nirvana

But coincidentally, the ECB’s next Long Term Refinancing Operation (LTRO) is set for February 29...

LTRO 2 101: Top-Down

With the second version of the ECB's enhanced LTRO (back-door QE) starting tomorrow, there has been a great deal of speculation on what the take-up will be, what banks will do with the funds they receive, and more importantly how will this effect global asset markets. SocGen provides a comprehensive top-down analysis of the drivers of LTRO demand, the likely uses of those funds, and estimates how much of this will be used to finance the carry trade (placebo or no placebo). Italian (25%) and Spanish (20%) banks are unsurprisingly at the forefront in their take-up of ECB liquidity (likely undertaking the M.A.D. reach-around carry trade ) and have been since long before the first LTRO. On the other side, German banks have dramatically reduced their collective share of ECB liquidity from 30% to only 6%. SocGen skews their detailed forecast to EUR300-400bn, disappointing relative to the near EUR500bn consensus - and so likely modestly bad news for risk assets. Furthermore, they expect around EUR116bn of this to be used for carry trade 'revenue' production which will however lead to only a 0.6% improvement in sectoral equity levels (though some banks will benefit more than others), as they discuss the misunderstanding of LTRO-to-ECB-deposit facility rotation. We, however, remind readers that collateralized (and self-subordinating) debt is not a substitute for capital and if the ECB adamantly defines this as the last enhanced LTRO (until the next one of course) then European banks face an uphill battle without that crutch - whether or not they even have collateral to post. Its further important to note that LTRO 2 cannot be wholly disentangled from the March 1-2 EU Summit event risk and we fear expectations, priced into markets, are a little excessive. We suspect this will not be a Goldilocks 'just right' moment.

Projected PIIGS Pillage: 3233.5 Tons Of Gold To Be Confiscated By Insolvent European Banks

While hardly discussed broadly in the mainstream media, the top news of the past 24 hours without doubt is that in addition to losing its fiscal sovereignty, and numerous other things, the Greek population is about to lose its gold in a perfectly legitimate fashion, following amendments to the country's constitution by unelected banker technocrats, who will make it legal for Greek creditors - read insolvent European banks - to plunder the Greek gold which at last check amounts to 111.6 tonnes according to the WGC. And so we come full circle to what the ultimate goal of banker intervention in the European periphery is - nothing short of full gold confiscation. So just how much gold will be pillaged by the banker oligarchy (it is amusing how many websites believe said gold is sacrosanct by regional national banks, and thus the EUR is such a stronger currency as it has all this 'gold backing' - hint: it doesn't, as all the gold is about to be transferred to non-extradition countries)? As the World Gold Council shows in its latest update, between all the PIIGS, who will with 100% certainty suffer the same fate as Greece (which has shown that unlike during World War 2, it is perfectly willing to turn over and do nothing) there is 3234 tonnes of gold to be plundered. And likely more as further constitutional amendments will likely make the confiscation of private gold the next big step. how much does this amount to? At today's prices this is just shy of $185 billion. Of course by the time the market grasps what is going on the spot price of the yellow metal will be far, far higher. Or, potentially far, far lower and totally fixed as the open gold market is eventually done away with entirely in a reversion to FDR gold confiscation and price fixing days.

Frontrunning: February 23

  • IMF Official: 'Huge' Greek Program Implementation Risks In Next Few Days (WSJ)
  • European Banks Take Greek Hit After Deal (Bloomberg)
  • Obama Urged to Resist Calls to Use Oil Reserves Amid Iran Risks (Bloomberg)
  • Hungary hits at Brussels funds threat (FT)
  • Bank Lobby Widened Volcker Rule Before Inciting Foreign Outrage (Bloomberg)
  • Germany fights eurozone firewall moves (FT)
  • New York Federal Reserve Said to Plan Sale of AIG-Linked Mortgage Bonds (Bloomberg)
  • G-20 Asks Europe to Beef Up Funds (WSJ)
  • New Push for Reform in China (WSJ)

'Til Debt Did Europe Part

'All is not resolved' is how Morgan Stanley's Arnaud Mares begins his latest diatribe on the debacle that is occurring in Europe. While a disorderly default seems to have been avoided (for now), the Greek problem (as we have discussed extensively) remains unsolved as debt sustainability seems questionable at best, economic recovery a remote hope, and the growing political tensions across Europe (and its people) grow wider. Critically, Mares addresses the seeming complacency towards a Greek exit from the euro area noting that it is no small matter and has dramatic consequences (specifically a la Lehman, the unintended consequences could be catastrophic). Greece (or another nation) leaving the Euro invites concerns over the fungibility of bank deposits across weak and strong nations and with doubt over the Euro, the EU could collapse as free-trade broke down. The key is that, just as in the US downgrade case last year, a Euro-exit implies the impossible is possible and the impact of such an event is much, much higher than most seem to realize. While the likelihood of a Greek euro-exit may remain low (for now), the scale of the impact makes this highly material and suggests the EU will do whatever it takes (print?) within their mandates to hold the status quo. For all practical purposes, it would be the end of the euro as a genuine single currency and to preserve the euro if Greece left would require total federalism in the rest of the area.

Sentiment Weaker Following Euroarea PMI Contraction, Refutation Of "Technical Recession"

January's hopium catchphrase of the month was that Europe's recession would be "technical" which is simply a euphemism for our Fed's beloved word - "transitory." Based on the just released Euroarea PMI, we can scratch this Euro-accented "transitory" addition to the lexicon, because contrary to expectations that the Euroarea composite PMI would show expansion at 50.5, instead it came out at 49.7 - the manufacturing PMI was 49.0 on Exp of 49.4, while the Services PMI was 49.4, on hopes of expansion at 50.6, which as Reuters notes suggests that firms are still cutting prices to drum up business and reducing workforces to cut costs. This was accompanied by a overnight contraction in China, where the flash manufacturing PMI rose modestly from 48.8, but was again in contraction at 49.7. We would not be surprised if this is merely the sacrifice the weakest lamb in the pack in an attempt to get crude prices lower. So far this has failed to dent WTI much if at all following rapidly escalating Iran tensions. What is curious is that Germany and France continue to do far better than the rest of the Eurozone - just as America has decoupled from Europe, so apparently have Germany and France. This too is surely "sustainable."