…And whither banks?
RBS with some interesting detail on ECB bond-buying tallies so far:
ECB intervention by a consensus of various polls that we have heard and our own estimates coalesce near Eur3-4bn yesterday, with two-thirds in Italy and the bulk of the rest mainly in Spain. The buying, as with the SMP tactics from last year, was up to 10y. The buying of Italy & Spanish debt has had a marked impact on key spreads to Bunds up to the 10y sector but beyond that there is little discernable benefit from the ECB intervention.
…Despite yesterday’s tightening in periphery spreads, following the ECB actively “implementing” its bond purchase programme, the failure of European bank stocks to rally highlights the synthetic nature of the yield moves – namely that they are [not] reflecting true risks in these country banking systems anymore.
That, we think, is the really interesting point. Not just bank stocks. Euribor-OIS three-month spreads are also refusing to budge down from their recent widening, to levels last seen in 2009. Spot Libor-OIS pushed out somewhat on Tuesday as well, though not by much. But it’s very weird all the same, given that Spanish yields are being sent back to the levels of November 2010 in some cases.
The ECB is rescuing Spain and Italy from a sovereign bank run, i.e. a liquidity crisis that would have become self-fulfilling. It can’t do much else really. But it may still be lending into a liquidity trap. It’s maybe relevant here that sovereign debt, the distressed asset in question, is naturally unlike other assets. It’s not collateralised and any claim on a government is precarious. There are all sorts of layers here though — the sovereigns are also the first port of call for back-stopping banks (notably Spain).
So, all the ECB might be doing is pumping up bond prices only for them to fall further in the eventual write-down — if you are that paranoid. It’s not over. So, another take then, via Gary Jenkins of Evolution Securities:
The key to the markets over the next few months will be not just be whether the ECB intervention can keep yields at artificially low levels, but whether investors will be prepared to lend to Italy and Spain at those levels. Spain is due to issue approximately another €34bn this year and Italy needs another €70bn by year end so it is vital that somehow the EU restores confidence in these sovereigns because the ECB / EFSF just cannot buy these kinds of amounts without serious political ramifications…
Whilst no doubt the issuance of common European bonds is a step too far for the politicians at this stage, maybe as a minimum they could change the terms and conditions of the ESM. Take away collective action clauses and private sector involvement (when the debt trajectory is unsustainable). After all, if Greece really was a one off solution why are they needed? Politically unpalatable, morally reprehensible it may be, but if you want to encourage bondholders to lend at a time of arguable the biggest financial crises for generations then you have to give them some confidence that they are going to be repaid in full and on time.
Well, we think there’s a greater chance of Angela Merkel running naked down the Unter den Linden at this point, frankly. It shows, though, just dangerous this gamble for resurrection has become.
Related links:
Funding stress revisited – FT Alphaville
What price, risk? – FT Alphaville (2008)
Euribor has been vaporised – FT Alphaville