Spanish Banks In Panic Mode Over Maturity Of ECB's €442 Billion Long-Term Refinancing Operation

As the reality of the previously discussed July 1 termination of the ECB's €442 billion LTRO is starting to dawn on Europe (for an extended observation on why this will likely be a very big deal, read here) the weakest financial markets in Europe are starting to panic. Case in point, Spain, where the FT reports local banks are fighting the ECB tooth and nail so their imperatorial nudity is not exposed for all to see: "Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme." The sheer terror at the impending reality of the liquidity crunch is captured nowhere better than in the words of this bank official: "Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd." Keep in mind that traditionally cheery and optimistic Erik Nielsen is also very much concerned about the roll off of the LTRO and how it will impact European banks. Hold on to your hats folks: July is going to be fun.

From the FT:

Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent.

The €442bn ECB facility, which charges interest at a rate of 1 per cent, is not set to be renewed, something that banks in Spain and elsewhere in Europe say ignores current commercial realities.

A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year.

A certain side-effect, even assuming the LTRO maturity occurs without major blow ups, is the imminent collapse in the lending pool across all of Europe:

BarCap estimates that at least €150bn of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending.

The reasons the ECB is wary of pursuing the same policies as encouraged by our own Fed's irresponsible "infinite liquidity" approach, are virtually the same as those presented earlier today by the BIS.

ECB policymakers worry that providing cheap loans for such a long period distort markets and could restrict the room for manoeuvre in monetary policy.

As for summarizing just how bad the European (and global) situation really is, none does it better than BarCap analyst Simon Samuels: "The system is just not working. We’re approaching the third year of liquidity support and still the market cannot survive unaided."

h/t London Dude Trader