That wasn’t quite our last pre-LTRO/Ltro/L-Troh post.
On Tuesday Marc Chandler, global head of currency strategy at Brown Brothers Harriman, ventured an interesting hypothesis on what the market’s response might be to the LTRO-II take-up, in relation to the consensus expectations of roughly €500bn.
The general view, he writes, seems to be that the larger the participation, the better for risk assets, including the euro. But…
Even if this assessment is true, there is another consideration that few have given much thought to; namely that we should expect the markets to respond differently to what very well may be the last LTRO than the first. Buy the rumor, sell the fact may not quite capture this point, though that remains a risk as well. When a central bank begins an easing cycle, the market’s response is typically different than when market believes it is the last move.
In a very broad sense, at least, there’s an argument that repeated central bank easing measures are subject to diminishing returns.
Chandler has another reason for questioning whether a big Ltro round will be seen as positive or negative: the “official creditor status” for the ECB/IMF/European Commission. Markets may not have digested what this might mean for the collateral used for Ltro loans, he says. And now the European Investment Bank is reportedly joining in the official status party too:
There does not seem yet to be much fallout from the ECB’s decision grant all official creditors senior status over all private sector creditors. Just today, the European Investment Bank claimed it too not be subject to the PSI. This has some implication not just for the bonds that the official sector holds, but also for the collateral. The ECB has the first claim if one of the institutions it lent to fails.
This suggests that a new stigma may have arisen by the ECB’s decision that did not exist in LTRO I. Admittedly this is conjecture, but there has been a change in ranking of creditors and this is something to which investors are sensitive.
Well, at least some banks were voicing their opinion just last week that Ltro stigma wasn’t a problem. But banks looking to tap the facility would hardly want to be caught saying otherwise.
At any rate, the EIB joining the ranks of official(ly protected) creditors seems likely to throw up some problems because, as Felix says, the ECB had a somewhat plausible reason:
While the ECB exemption was understandable, on the grounds that the ECB was part of the Troika and the Troika is putting up new money here, an EIB exemption is less so. The EIB is not putting money into this latest Greece bailout. Indeed, it represents countries like the UK which are quite explicitly removing themselves from any such thing.
We also wonder what Isda will make of this…
Related links:
There are official creditors, and there are ‘official’ creditors - FT Alphaville
The L-troh, the credit crunch, and the carry trade – FT Alphaville
Draghi must be wary of Ltro elixir’s power – FT
LTRO coverage – FT Alphaville