The Insanity Of The Sarkozy Carry-Trade's Contagion Risk In 3 Charts

The last month has seen a considerable amount of the post-LTRO gains in Italian and Spanish Sovereign and Financial credit markets (and stocks for the latter) given back. The stigma priced into LTRO-encumbered banks has also surged to post LTRO record wides - more than double its best levels now. This is hardly surprising - while the LTRO was nothing but a thinly-veiled QE printfest, it is the action that was taken with that newly printed money that has created dramatially more contagion risk and sovereign-financial dependence as an unintended consequence. The collosal (relative and absolute) size of the reach-around Sarkozy carry-trade buying in local sovereign debt for Italy and even more so Spain is highlighted dramatically in these 3 charts for BNP, most notably the increase in banks' holdings of sovereign debt compared to their share of Eurozone sovereign debt - i.e. the banks in Italy, and more so Spain, are hugely more exposed to their sovereign's performance and with Spain's massive budget cuts - a vicious cycle of austerity to growth-compression to credit-contraction to Greece (firewall or not) is leaking into their bond markets, even with an active ECB doing SMP although inflation-constrained from LTRO3 perhaps.

Italian and Spanish banks went on a buying spree...

In the three months to February there was a huge increase in Italian and Spanish banks’ holdings of sovereign debt. February data also showed a large rise in Portuguese banks’ holdings

But the scale of Spanish bank purchases is striking compared to the size of outstanding government debt...

Slovenia, Italy, Portugal and Slovakia also saw large increases in this context

And compared to Spain's share of Eurozone government debt, Spanish bank buying is incredible...

 

The increase in Spain is also exceptionally high in relation to its share of eurozone government debt. The reverse is true for Germany and France.