European Interbank Lending Conditions Deteriorate Fast Post Latest Liquidity Withdrawing LTRO Roll

Tyler Durden's picture Submitted by Tyler Durden on 10/12/2010 07:52 -0500

Commercial PaperEuropean Central BankEurozoneFail

A week ago we asked whether “Europe was getting ahead of itself as excess cash in the euro banking system drops to post-Lehman low” following the most recent LTRO roll. In it roughly €225 billion in 3,6 and 12 month liquidity providing ECB credit facilities to Eurozone banks expired and were rolled into a far lower amount of replacement maturities: only 64% of the full amount was retendered, meaning about €80 billion in system liquidity was drained. As we then assumed this action was nothing than a myopic attempt to put some lipstick on the slaughtered European banking pig, which in exchange for demonstrating that it has liquidity matters under control was willing to cut its excess liquidity buffer to almost zero. Sure enough, the market now seems to agree. As the chart below demonstrates, virtually every unsecured funding metric has exploded since the action, with the rate on Commercial Paper nearly doubling from the pre-LTRO days, while three month Euribor has once again surged to just under 1%. In other words the market is making liquidity provisioning for European banks very costly, and a threshold may soon be passed when it is cheaper to borrow via the Fed’s currency swap arrangement than approaching the interbank market, once again confirming that while the ECB is backstopping all the financial activity in Europe, it is the Fed which is on the hook should the ECB fail.

Even JPMorgan looked at this liquidity disruption negatively:

Is this week’s sharp decline in the excess cash sustainable? The availability of unlimited liquidity at the weekly operation combined with this week’s sharp rise in interbank rates, is likely to trigger some speculative borrowing from the ECB over the coming weeks, but this is unlikely to be large. The main lesson from the expiry of the ECB’s long term operations, both this week and last July, is that the withdrawal of long-term ECB funding discourages speculative activity by core banks and this pushes the excess cash in the Euro area banking system to a new lower range, only modestly above zero.

The market has now spoken and is again forcing European banks to drop the farce, and go back to suckling at JC Trichet’s teat as they are so experienced at doing.

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by hugolp
on Tue, 10/12/2010 – 07:55

I wish I could have a business where if things go wrong, instead of going bankrupt I just can get cheap money through devaluation of everyone elses money.

Login or register to post comments by snowball777
on Tue, 10/12/2010 – 08:00

Too lazy to deal crack?

Login or register to post comments by hugolp
on Tue, 10/12/2010 – 08:44

Selling crack is more respectable than banking as it is now. At least they have to deal with market consequences.

Login or register to post comments by snowball777
on Tue, 10/12/2010 – 08:59

Well put.

Login or register to post comments by taraxias
on Tue, 10/12/2010 – 09:03


Login or register to post comments by Perseid.Rocks
on Tue, 10/12/2010 – 07:56

That rushing waterfall sound is starting to get real loud now.

Login or register to post comments by snowball777
on Tue, 10/12/2010 – 07:59

Brother can you spare a euro?

I think I’m getting sea-sick from this FX teeter-totter, but a little puke is worth the action.

Login or register to post comments by idea_hamster
on Tue, 10/12/2010 – 08:00

I’m reminded of those NatGeo tv clips where all the dinosaurs look up with meek curiosity as a blazing meteor descends from the sky.

Login or register to post comments by wiskeyrunner
on Tue, 10/12/2010 – 08:00

So much for the sell off, futures about to go green.

Login or register to post comments by Iam Rich
on Tue, 10/12/2010 – 08:08

Heh, no kidding.  Seems the 4a EST ramp is alive an well.  What is that all about anyway, every morning like clockwork?

Login or register to post comments by RobotTrader
on Tue, 10/12/2010 – 08:01

No worries.

Any “convulsion” in Europe will simply:

1)  Cause an immediate panic into U.S. Dollars and U.S. Treasuries

2)  Interest rates will collapse to fresh, new 50-year lows

3)  McMortgage rates plunge below 4%

4)  Interactive Brokers lowers margin interest rate to .02%

5)  “Animal Spirits” are re-ignited

And the “Wash/Rinse/Repeat  Algo/Igor/Robo” sequence starts anew…


Login or register to post comments by 99er
on Tue, 10/12/2010 – 08:02

Music To Match The Market

Login or register to post comments by jortex
on Tue, 10/12/2010 – 08:04

Goldman has raised its 12-month price target for gold to $1,650 an ounce

from the prior forecast of $1,365 an ounce. Can you say “Gold Top”.

Login or register to post comments by UninterestedObserver
on Tue, 10/12/2010 – 08:17

Uh yeah if the Euro becomes toilet paper then OBVIOUSLY gold will drop – is that you Johnny B?

Login or register to post comments by Cognitive Dissonance
on Tue, 10/12/2010 – 08:10

The world’s economic plate spinners are plainly getting worried here.

This all reminds of when you’re driving down a wet and icy road and some animal jumps directly in front of you. First you swerve one way, then the other in ever increasing steering wheel movements. You wind up overcompensating until you land in a ditch. Or you hit a bridge abutment.

I keep thinking that the world is run by very fast computers and monitored by very slow and fallible humans. Guess who will win lose in the end?

Login or register to post comments by assumptionblindness
on Tue, 10/12/2010 – 08:32

As a lesson, it is best to keep the steering wheel straight, apply the brakes and turn on the windshield wipers.  It will definitely be a BAD day for the animal but at least you stay on the road and don’t risk loosing control of your car.  As a financial analogy, I guess that it is too late for that now…damn.  We are headed for the ditch while the black swan laughs!

Login or register to post comments by LeBalance
on Tue, 10/12/2010 – 08:44

Its fauna dependent: in some climes that may be a Moose.  If it is hitting it has a high probability of being your demise.

And in this instance this headlight paniced furry sweetheart turns out to be Godzilla for most people.

Login or register to post comments by Cognitive Dissonance
on Tue, 10/12/2010 – 08:52

Many many moons ago, a friend took two years off from college to devote some time to the Peace Corp. He can back to tell me stories of swerving off the dirt roads (dirt paths really) to avoid elephants and rhinos.

In the understatement of the century, he assured me that is wasn’t in your best interest to hit them if it could be avoided. :>)

Login or register to post comments by assumptionblindness
on Tue, 10/12/2010 – 09:56

I stand corrected.  The lesson is to drive slowly (which was obviously NOT the case) as to avoid that potentially nasty collision with a Moose, Rhino, Elephant or that Anthrax-dusted Black Swan. 

Login or register to post comments by Djirk
on Tue, 10/12/2010 – 08:41

Central bank letting the market do it’s job?

Login or register to post comments by Silverhog
on Tue, 10/12/2010 – 09:06

You can’t rush rigor mortise.

Login or register to post comments by macholatte
on Tue, 10/12/2010 – 09:36


Marc Faber Says World Heading for `Major Inflection Point’

Login or register to post comments by TuesdayBen
on Tue, 10/12/2010 – 11:03

The silver lining for me is that 1YR LIBOR, the index on which my mortgage is based, is down to 76bps!  WooHoo

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