First some charts from Barclays:
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LTRO-porn continues… this time it’s semi-core.
As we noted before, the higher than expected repayments by banks of the Long Term Refinancing Operations to the ECB might also push up the amount of paper in circulation as collateral which was tied up in carry trades is returned to banks. That would put pressure on markets which benefitted from the LTRO cash.
What we didn’t think of was Belgium. Poor thing. Read more
From the ECB on Friday:
As announced by the Governing Council on 8 December 2011, counterparties have the option to repay, after one year, any part of the amounts that they were allotted in the longer-term refinancing operations settled on 21 December 2011 and 1 March 2012, on any main refinancing operation settlement day. Accordingly, on 30 January 2013 EUR 137159.10 million will be repaid in the tender 20110149 by 278 counterparties.
Take one big pool of eurozone liquidity, insert straws and start sucking.
We’ve already opined on the chances that early-LTRO repayment will lead to a drain on excess-liquidty in the euro-area. But we argued that since it is unlikely to take more than about €200bn out of circulation, with consensus expecting about €130bn to be sent back, the effects should be muted.
But what if another straw is soon to be inserted? Read more
LTRO repayment chat is speeding up the closer we get to the fateful day at the end of January when Euro-banks might actually start sending back once cheap cash to the central bank. How much will be repaid, by whom and when are the questions that need to be answered.
Thing is, it seems that by at least one measure, the market is mispricing the amount of cash that’ll flow back to the European Central Bank. And maybe ignoring the ECB’s motives in this whole debate. Read more
The ECB announced some updates to its General Documentation on Wednesday. The item on ABS modifications caught our eye.
The move in question was first announced last April, and it represented a toughening up of the rules around ABS collateral for borrowing from the ECB. The update therefore isn’t so much a surprise as a reminder of one of the ongoing, but less spoken about, hangovers of the crisis.
Let’s review the situation… Read more
Asset encumbrance ratios are becoming a fashionable metric when it comes to assessing the health of banks.
On that note, Société Générale’s cross-asset research group provides a nice little break-down on Monday. While SocGen don’t believe that asset encumbrance is a major problem for any bank yet, they do recognise that the issue is becoming important on account of banks’ recourse to secured funding, and one likely to be picked up on by ratings agencies soon. Read more
Consider this chart from Bank of America Merrill Lynch:
What it shows is pressure building on the front-end of Euribor contracts. Short positions might be stacking up, apparently.
Why? It might be because there is speculation flitting about that European banks will begin to pay back some of their LTRO cash in the near future. Something not everyone thinks is likely to happen. Read more
Italy’s March balance of payments data showed a big net outflow for investment
This was something picked up by Deutsche Bank’s Alan Ruskin (and us, here) as suggesting an accelerating outflow of foreign capital from Italy, now that the LTRO glow had worn off. It appeared to be happening, worryingly, at a rate that was not being offset by Italian repatriation of capital. Read more
The European Central Bank will meet on Thursday, and the broad consensus is for rates to remain on hold. After yesterday’s dismal Purchasing Manager Indices, the press conference will be watched even more closely.
A quick recap of those PMI numbers, courtesy of Jim Reid and Colin Tan at Deutsche Bank, and then onto the implications for the ECB’s rate setting. Read more
Hold the phone… something very interesting in the Spanish banks <=ECB=> Spanish sovereign nexus came up at the end of last week.
Suggesting that it’s in better shape than the Italian version of the nexus. Read more
Beyond Thursday’s back-up in Spanish bond yields — questions about Spain’s banks.
How could there not be when they’ve been buying so much sovereign debt since the LTRO. Ever since December’s record jump of €22.5bn in purchases in fact, as banks began washing LTRO cash through the domestic bond market. (Chart via Nomura) Read more
Thanks to Mario Draghi’s double installment of 3-year LTROs this year and last, it’s been a while since we’ve had to worry about dysfunctions in the European repo market. Indeed, it wasn’t that long ago that the market’s problems appeared fully contained. But, could we have spoken to soon?
The ECB’s move to unclog the transmission mechanism, that carries its monetary policy decisions to markets and the wider economy, has been unconventional. The €1,019bn in cheap three-year loans to banks, under its long-term refinancing operations (LTRO), being the most daring.
Naturally, the question on the minds of many is whether the operation has just delayed the inevitable. While the policy goal for the eurozone’s central bank was clear — unclog the transmission mechanism — the fact that this would just buy time for the fiscal and balance sheet readjustments of sovereigns and banks was evident from the beginning. Read more
In February, European banks lapped up €530bn of funding from the ECB, for a three-year term. In November, they’d taken €489bn. ECB president Mario Draghi called the operations an “unquestionable success”.* That’s nice.
But how can we objectively measure the success or failure of this unprecedented support by the central bank of so many diverse nations? Read more
Deutsche Bank, whose chief executive decried the stigma of tapping ECB three-year liquidity last month, has borrowed at least €5bn and as much as €10bn from the latest LTRO, the FT reports. Investors briefed by the bank’s finance director and investor relations executives say it was persuaded by the economics of the financing to abandon its concerns. Josef Ackermann had said that Deutsche was “loathe to give up” its reputation for never having taken government money. ECB president Mario Draghi revealed on Wednesday that 460 of 800 banks that funded from the February LTRO were German. Read more
Banks deposited a record €821bn over the weekend at the European Central Bank after the bank last week injected a second wave of funds into the eurozone banking system, the FT reports. On Wednesday the ECB announced that 800 banks had borrowed €529.5bn in the second phase of a cheap three-year loan programme being offered by the central bank, a move aimed at easing funding pressures on eurozone lenders. In total lenders have borrowed more than €1tn from the ECB at a rate of 1 per cent under its three-year longer-term refinancing operations (LTRO) in February and December. On Thursday night, ECB overnight deposits rose to €776.9bn, also a record. Following December’s LTRO deposits in the ECB’s overnight facility also jumped, hitting about €450bn at the end of the year. Some suggested that the high level of funds being kept at the ECB is a sign of market tension and an indication that banks are opting for safety, given that the ECB’s overnight deposit facility only earns an interest rate of 0.25 per cent. However, others pointed out that it would be impossible for banks to redeploy that level of capital so quickly. Read more
Banks including Barclays, Lloyds and Credit Agricole will use funds they borrowed from the ECB’s three-year liquidity operation to prop up subsidiaries in the economies of the eurozone periphery, the WSJ reports. Barclays’ Spanish and Portuguese units tapped funding in the February LTRO, while Credit Agricole partly borrowed through its Greek offshoot. In getting subsidiaries to fund from the ECB in this way, parent banks will be able to limit exposure to the units if the local economies falter, or even leave the euro altogether. Meanwhile, there are fears that banks will use LTRO cash to redeem so much bank debt in the next year that corporate debt markets could sharply contract, says the FT. Read more
Yeah, we knew the LTRO-inspired rally would make it easier for European banks to start closing the gap between their capital ratios and those required by the EBA – or at the very least, as in the case of Commerzbank, embolden them to announce big plans for doing so.
The EBA — remember all that tough talk last October about monitoring banks closely to make sure the recap was asset sales-light and capital raise-heavy? — is amusingly eager to disavow credit for any recent improvements. Just banks doing their thing, especially if by “their thing” one means “breathing easier now that they’re allowed to pledge dirty skivvies to fund themselves, and shareholders are off their backs for the moment”. Whatevs. Read more