Notes From Underground: IN”LTRO” FERTILIZATION

Okay, the German Lower House of Parliament approved the funding for the Greece bailout, though Chancellor Merkel had to reach “across the aisle” to secure the necessary majority as some members of her coalition abstained or voted no. This is certainly no major surprise. Now the focus will return to Wednesday’s LONG TERM REFINANCING OPERATION (LTRO) and see how large the uptake will be from European banks and how much the ECB may try to cram into the system. The Geithner/Schauble squabble over IMF funding may give DRAGHI the edge he needs to push a larger LIQUIDITY ADD THAN THE 470 BILLION EUROS reported last Friday in a BLOOMBERG article.

The German administration is being criticized by the G-20 and others for failing to show the needed leadership to help resolve the European Financial crisis. ECB President Draghi has been Bernankesque since taken the helm of the ECB. With Germany on its diplomatic heels, this may be the final opportunity he has to push through a very robust LTRO. Secretary Geithner, and presumably Bernanke, would be in favor of the ECB doing as much as possible to provide immediate liquidity as to take some of the pressure off the FED.

The BOJ, in its recent actions, have also given DRAGHI some cover for a larger addition as the EURO/YEN cross has rallied almost 11% since its January lows. While the LTRO won’t solve the sovereign debt issues in Europe, it will provide some time for the European policymakers to TRY to get ahead of the credit problems rather than going from CRISIS TO CRISIS. Preventing an immediate deleveraging is of major importance, especially as the global economy is struggling to sustain growth.

There is no question that the first LTRO program had an impact in preventing a massive liquidation by FERTILIZING THE BUYING OF THE SHORT END OF THE SOVEREIGN CURVE IN EUROPE. The ECB has also aided the European banks by allowing some curve surfing by providing cheap 3-year money, thus preventing the mass sale of assets in order to shore up bank balance sheets. Does this solve the problem? ABSOLUTELY NOT. BUT IT DOES HALT A MASSIVE LIQUIDATION IN A BALANCE-SHEET-STRESSED WORLD.

*** The positive news in the European debt markets is that the 2/10 curves in the GIIPS have remained in positive slope mode. Portugal was at its recent highs by closing at +79 basis points. The Italian, Irish and Spanish curves all remain above 250 basis points, an indication that the first LTRO has been a success in preventing an inversion of the 2/10 curves and throwing the funding requirements of the sovereigns into total disarray. As DRAGHI emerges from the laboratory of central bank policy, the markets will watch to see if this next attempt at enhancing liquidity gives birth to another round of positive results … at least for a trimester.

***An issue that reared its head today was whether or not ISDA will declare the GREEK PSI to be a “DEFAULT” and set in motion the payout on all the CDS contracts. For the past few months, ISDA has maintained that because the PSI was voluntary it did not TRIGGER A DEFAULT WITH A CDS PAYOUT. It seems that ISDA was being coerced by the European Union to signify a default so as to undermine the effectiveness of the CDS market. Many EUROPEAN LEADERS view the CDS market as pure speculation and do not wish to see the “speculators” paid out. REMEMBER THE PHRASE EMPTY CREDITOR. It seems that ISDA is taking the Bill Clinton approach: “I DID NOT HAVE CDS WITH THAT COUNTRY.”

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3 Responses to “Notes From Underground: IN”LTRO” FERTILIZATION”

  1. rohrintl Says:

    HI Yra-
    Typically sardonic high-end insight… kudos

    Presume “Bernankesqe” not necessarily a compliment to Draghi, even if he was backed into a corner by overly rigid Trichet policy.

    In the ISDA comment at the end did you really mean to say that it was “…being coerced… …to signifiy a default…” or was that a typo where you meant they were being coerced to NOT signifiy one?

    The latter has been my understanding. Possibly I’m not clear. Thanks in advance for any clarification on that, as it is going to be one of the more interesting aspects moving forward. Do you have any sense of the remaining (i.e. not laid off or hedged) European bank exposure if a default is declared? Possibly a reason the European banks’ stocks have performed so badly recently?


  2. yra Says:

    ROHR–yes good correction—coerced NOT to declare a default.IN Draghi’s effort to be Bernankeesqe that is not a criticism for Trichet left a mess of ECB policy and Mario Draghi has had little choice with Germany being “a TEA PARTY STATE OF LIQUIDATIONISTS”-the Austrian debate left Europe a few years ago and the result of massive liquidation of assets in the present world environment would be a major disaster.So in this sense and time I am not criticizing President Draghi and actually applaud his efforts to correct the inasanity of J.C. Trichet.The Bernanke adjective becomes a problem when it is the only response to every issue.No clue as to the size of the EXPOSURE and I sincerely doubt anyone else does either.The opaqueness of the CDS market in its entirety makes any conjecture subject to skepticism–the LCH and others will say the exposure in minimus while the POLITICOS will make the amount a systemic event—the guess of the size will be left to DSK’s chambermaid

  3. asherz Says:

    ISDA calling Greece a non-default is reminiscent of governmental interference with legal oblications to Chrysler bondholders. Hedgeing operations are being weakened as contract obligations are dismissed. Risk avidance taking body blows.

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