ECB Bazooka is a fizzer

So it seems Santa could only last one night.

Yesterday I said

…It may just be that banks end up using the facility to roll-over existing debt rather than using it to actively make new purchases.

Given that many of the European banks are attempting to de-leverage and simply hold higher levels of capital in order to meet their requirements under Basel III this makes sense. However, that doesn’t mean that the new LTRO along with the lower reserve requirements wouldn’t have some flow-on effect to bond markets, I am just not sure it is going to be used at the level and/or for the purpose the bond market seems to be suggesting. There are, however, some rumours out of Italy that suggest otherwise.

We will find out the answer to some of those questions tonight when the banks make a choice between the 7-day, 3-month or 3 year ( with a 12 month exit ) repo facility. A good uptake on the later should provide some support for all markets in the short term, at least until it is established exactly what the banks are doing with the facility.

When I said “short term” what I meant was something like a few days in which the market could determine, in the least, if the banks had simply parked the additional new money back into the ECB deposit facility or there were signs that they were using it to buy back their own bonds. However, it looks as though the market decided about one hour after the announcement that 523 banks had used the new 1134 day repo facility to the tune €489.19bn that this new money was going to be for re-capitalisation and de-leveraging operations.

Firstly a bit of clarity around the headline number. In the picture below I have taken the recently ending repo operations from the ECB’s open market operations history page. What you can see is that the banks significantly lowered their use of the shorter term facilities after the 3 year LTRO appeared.

It would seem that the banks have reduced their use of the 7-day MROs by  €122.6bn and the 3-month LTRO by €110.9bn. It is also worth noting that on the long term facility’s page there is a note:

The allotment amount of EUR 489,190.75 million includes EUR 45,721.45 million that were moved from the 12-month LTRO allotted in October 2011

So if we deduct all of those numbers from the headline number what we actually find is that banks got €209.9bn. This is still a large number but considerably less than the headline. If you divide it by the number of banks involved it equates to an average of just over  €400 million for each bank. Obviously some banks will get more and others less, but it does put the number into perspective when you see it that way. If an Australian bank raised an additional $400mil it certainly wouldn’t be headline news across the globe.

As I said above the outstanding question is exactly what the banks will do with this additional funds, on top of their other capital that is now available due to the lessening of the reserve requirements. Will banks take an interest in re-cycling that money through their sovereigns? If not then the new year’s sovereign bond market is probably going to be ugly. The movement on the Italian and Spanish yields last night may suggest that the market already thinks this is the case, but we will have to wait and see.

That opinion,however, was backed up by statements from the Italian banking association in a reversal of the rumour I linked yesterday.

While a lending crunch may have been avoided thanks to the ECB’s latest move, it is much less certain that banks will use the money to buy Italian and Spanish government debt, as French President Nicolas Sarkozy has urged, given the competing pressures on them to cut risk, rebuild capital and lend to business.

“While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain skeptical of the idea that the operation will ease the sovereign debt crisis too,” said Jonathan Loynes, Chief European Economist at Capital Economics.

Banks will not increase their exposure to sovereign debt because European Bank Authority (EBA) rules discourage it, Italy’s banking association (ABI) said.

“The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB’s important liquidity injection … can be used to support sovereign debt,” ABI director general Giovanni Sabatini told reporters.

It will also be interesting to see if the next LTRO operation gets as much interest. I noted yesterday that FTAlphaville had a short post on comments from the Bank of England minutes specifically around asset encumberance in securitised markets.

What’s really interesting is that the Bank of England seems to imply that the trend towards a collateralised lending framework is not sustainable. Specifically, they explain, there is a natural limit to this type of funding due to asset encumbrance.

When institutions run out of repo-able assets the funding environment can change sharply and quickly, especially with respect to the general availability of credit in the market place. Rates for normal households and businesses would simply soar.

I wonder if Europe could ever reach such a limit given the renewed ECB flexibility on repo operations.

As noted in today’s links, while all of the focus is on banking operations the real economy continues to stumble with Italian GDP contraction signalling recession:

The Italian economy contracted in the third quarter, signaling the country may have entered its fifth recession since 2001 as the government adopts new austerity measures that will further weigh on growth.

Lucky banks have got all that new capital…. They’re going to need it.

Latest posts by __ADAM__ (see all)


  1. …and the sovereigns still need the money…so where will they get it from, if not from increasingly expensive private sources, and not from dwindling stability funds?

    ah, Faber! “zey will print, print, print!” 😉

    My 2c

  2. So the ECB stealth prints, and… gives it all to the banks. It’s like Groundhog day – we come coming back to 2008. It is most certain that at least one bank will do a Lehmans next year. Most of the European banks are insolvent, how long do they need to keep propping them up with either taxpayer euros or printed money? What frightened the bond markets is how much money was loaned. Just how bad are those banks out there (of course we don’t know because they won’t say)?

    And what did they do with that money? Given that the ECB had to buy some bonds last night, the clearly aren’t going to buy shakey Sovereign Debt. Nup – some nice easy loans to blue chips which gives them a risk free high-percentage carry profit. And they are *still* in trouble.

    Also while we are talking about Lehmans, I see an ex-Lehmans exec is now the new Spanish Finance Minister. In a sane world having Lehmans on your CV at that level would guarantee you were never in charge of anything bigger than organising the office Xmas party ever again, but in the bizarre world of banking on this planet it’s a passport to country-size financial incompetence.

    “Wow, you’re one of the guys who was in charge of the biggest bank failure in history – come manage our country!”

    • >So the ECB stealth prints, and… gives it all to the banks. It’s like Groundhog day – we come coming back to 2008. It is most certain that at least one bank will do a Lehmans next year. Most of the European banks are insolvent, how long do they need to keep propping them up with either taxpayer euros or printed money?

      Well I agree with your sentiment. I believe there are a number of European banks that are insolvent and, if Europe actually had any decent regulator oversight, should be accessed as such and nationalised. As you say, I also expect to see a number of them to fail next year given the state of the real economy and the continuation of a policy based on austerity.

      It makes far more sense to front run that process so it can be “managed” rather than continually wasting effort on keeping these institutions alive only to have them fail in an un-managed way at a later date.

      Having said that this operation isn’t “technically” money printing. Please note the word is “technically”.

      The new LTRO is simply a long running repo. Repos are used in normal operation within all central banks as a means of providing interbank liquidity to support a target interest rate. See this link for more.

      The long running nature of this particular repo is about providing market stability. I have no issue with that part per se. The problem I have is with the invisiopower! nature of the collateral changes in which banks are given reserves on the basis of an asset-swap that may well be more than real market value.

    • Extend and pretend, again. Buys Europe another lull in the crisis and more time for the banks and sovereigns to dig a deeper hole for themselves.

      “You cannot borrow your way out of debt.”

  3. a fizzer? really? i think we should probably give this longer than 5 or 6 hours before calling it a fizzer

        • GB: Frankly, you’re tripping if you think this has “fixed” the European debt crisis. The LTRO will have a half-life 30% shorter than the last acronym. What was it? EFSF? ESM? I’ve forgotten already, and so as everyone else!

          Its bullsh*t and everyone knows it.

          • +1

            Everyone being the wider market that left the rose coloured glasses at home.

            As Gus said a few posts above:
            “You cannot borrow your way out of debt.”

            Austerity bites in Italy. So, whats the recession/depression count? All the PIIGS confirmed so far.

            Growing economies via austerity, you gotta laugh 🙂

          • Veloc

            I doubt anyone believes that, short term, they can expand the current GDP measure through austerity.
            The alternative is money printing and inflation. Further if the last 50 years should have proven anything it would be that high inflation, with negative RAT rates, does NOT result in less debt. The idea of inflating away debt is baloney.

            We’ve all lived beyond our means for half a century. The piper is demanding to be paid. We will pay eventually one form or another.

  4. Is it just me or is this just getting to a totally out-of-hand way to shuffle the deck chairs on the Titanic?

    What would the consequences to a mass bankruptcy/default be? Surely a shorter, albeit sharper recession?

    • But banks will take losses, you can’t have that.

      Global Macro 101, 21st Century: Banks don’t take losses, citizens do, the poorer the more insignificant.

  5. I want to try a repo with a pawnbroker. I get hime to give me $2k for a set of fkd golf clubs which I promise to come and get back later. The clubs got run over by my car and all bent up but the insurance company wouldn’t pay – said it was my own fault.

    I’ll buy myself some new clubs.

    (later) pawn broker laughed and told me to try the ECB.

    (later) ECB laughed and said only if you’re a bank.

  6. I actually think it will work.

    This whole thing could blow over and disappear in an instant. It could also still implode big time.

    I don’t want to make any predictions but this rollover fund or whatever you want to call it could settle things down.

    The next big to look out for is GDP. Many a predicting decline but I have a feeling Germany will surprise.

  7. Yes it is “only” 210 billion Euros net; but still, somewhat cocky to think those have fizzled already. There was some macro-frontrunning into the LTRO and some selling into the announcement – a relatively easy trade.
    Yesterday the money was even not even there yet. It arrived today. All we had was a kind of frontrunning poker, to mix up some metaphors.
    Now comes a harder part in this epic battle. I think it is frankly naive to assume that any banker will tell you honestly what exactly he is planning to do with the money. But I would bet that a lot of it will show up at Gov Bond Auctions and maybe even before year-end to prop up some prices. Also consider that those bond will be accepted as collateral at any Repo facility the National Central banks will provide in the future, rinse, repeat. It is a nice spread to lever into if you are an Italian or Spanish bond trader.
    IMO the Eurozone will not die not because some TBTF European Banks will run out of ECB-notes. US-Dollars also are supplied as we know.
    One should not underestimate the willingness of the European political class to pump Euros into bottomless pits – it still could go on for years.