Portugal shut out of OMT in order to keep Greece out
Guest post by Sober Look.
In late August JPMorgan argued that the ECB’s OMT (Outright Monetary Transactions) program should start with Portugal (see discussion). The prediction was wrong – the ECB disqualified Portugal from participating. But why? After all Portugal has complied with multiple troika reviews and the monetary transmission mechanism in Portugal has clearly been broken. The chart below shows that Portugal’s private sector has not benefited from the ECB’s liquidity injections (LTRO) and the lower overnight rate (prime example of broken monetary transmission).
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| Source: JPMorgan |
What’s particularly strange is that the whole justification for the ECB launching this sovereign bond buying program to begin with had to do with problems of monetary transmission (see discussion) in the Eurozone.
Schadenfreude Is a German Word
Guest post by Peter Tchir of TF Market Advisors.
The market is relatively stable overnight and this morning. Yesterday traded in fits and starts with brief moments of concern that Friday’s sell-off would continue and brief moments of hope that Europe was going to do something to fix the situation in Europe. Trading was on light volume and liquidity seemed low as gaps of 5 pts on the S&P 500 seemed the norm.
With the U.K. shut for a second day due to the Queen’s diamond jubilee, there isn’t much of a read on credit markets in Europe. Spanish and Italian 10 year bond yields are better for the fifth day in a row in the case of Spain. 5 year yields are more mixed and CDS, without London, is effectively shut. Here in the U.S. with futures hovering around fair value the credit indices are stable with IG18 1 wider and nearing the 130 level, but HY18 finally outperforming and actually up an 1/8. HY managed to squeak out a small win yesterday in ETF land with HYG and JNK both up, and the EMBI index had some real strength. This is in spite of continued outflows from the funds, though with the ETF’s now trading at less than a 1% discount we may see any arb driven activity slow.
Is the German Pot Calling the PIIGS Kettle Black?
We seem to get the daily barrage of messages and soundbites out of Germany demanding that countries stick to existing plans and that “austerity” is the only way forward. Germany continues to love to point the finger at the other countries and accuse them of borrowing too much and that these countries need to suck it up and pay what they owe. For now we will ignore the fact that Germany itself was one of the first countries to break the Maastricht Treaty. What Germany seems to be forgetting is that they jeopardized their own credit quality. With bunds at record lows, this may not be obvious, but for the past 2 years, Germany has been throwing around guarantees and commitments like they meant nothing.
D Day coming up?
6th of June is approaching. Expect something “big” to happen, as a Grexit is too premature at this stage. With equity markets down sharply over the past weeks, the central planners are not overly happy. In order to pump up the confidence (and the markets), these are the optons. By Peter Tchir of TF Market Advisors.
The ECB meeting on June the 6th seems key to me. Markets and economies are teetering across the globe. More and more people are coming to the conclusion that a Greek Exit would be catastrophic. Central banks won’t want to act as though they are panicking, but neither will they want to wait much longer to act. The regularly scheduled ECB meeting on the 6th is an ideal date for the first salvo to be fired.
Globally Coordinated Swap Lines
The easiest thing for central bankers to do in conjunction with the ECB would be to reduce the cost of the swap lines and once again extend their maturity and potential size. This is largely symbolic. The rate cut would help those that are using it, but 25 bps on that is not going to be a game changer for any bank in the near term. The lines are already in place, so any maturity extension or reiteration of commitment to swap lines is purely optics. On the other hand, it would show that once again all the major central banks are working together, are aware of the problems, and are committed to employing strategies to resolve it. It should calm growing chatter that the Eur/USD basis swap is trending weaker lately. An announcement like this is largely feel good, but since it costs next to nothing relative to what they are already doing, it is an easy step for central bankers to take and enhance any other policy announcements on that day.
ECB Rate Cut
The ECB should cut rates 25 bps on that morning. It would add to the “feel good” nature of yet another swap line announcement. The cut is unlikely to do much for sovereign debt yields. Unlike in the U.S. where treasury yields are sensitive to the Fed’s short term rate, the connection in Europe has long been broken. German and French yields trade far better than the ECB’s overnight rate and won’t move on the back of it. Italian and Spanish bonds yield far more than the overnight rate because of real credit and currency conversion risk. Spanish and Italian bond yields may improve on the announcement but it will be because of the “symbolism” of the cut and the ECB’s willingness to be aggressive.
“Cruel” April in Charts
It has been a rather volatile April this year. Some markets have collapsed, like the IBEX. Others have performed better.The “risk on/risk off” barometer moved back in the direction of “risk off” during April, as U.S. 10-year Treasury securities turned in the best investment gains (in U.S. dollar terms) during the month. The 2.8% jump in the value of the Treasury securities came despite the almost universal perspective on the part of professional investors that the 30-year bull market for bonds is finally sputtering to a halt and that eventually interest rates will begin to climb. Investors displayed a clear bias in favor of assets that not only generated income but also offered them security – in other words, bonds of various kinds were the only major asset classes to end the month in the black.
Private to public sector arbitrage
Spain is continuing to dominate the news. Bad Bank loans are hitting new record levels, while the (European) tax payers are paying for the stupidity. From Bloomberg.
Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.
Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros ($289 billion) at the end of January, data from Spain’s treasuryshow. Italian banks increased ownership of their nation’s sovereign bonds by 31 percent to 267 billion euros in the three months ended in February, according to Bank of Italy data.
In Spain, stronger banks such as Banco Santander SA, the country’s largest lender, can handle losses from their sovereign holdings. Photographer: Denis Doyle/Bloomberg
German and French banks, meanwhile, have cut holdings of those countries’ bonds, as well as Irish and Greek debt, by as much as 50 percent since 2010 in some cases. That leaves domestic firms on the hook for a restructuring such asGreece’s last month and their main financier, the European Central Bank, facing losses. Like Greece, governments would have to rescue their lenders with funds borrowed from the European Union.
“The more banks stop cross-border lending, the more the ECB steps in to do the financing,” said Guntram Wolff, deputy director of Bruegel, a Brussels-based research institute. “So the exposure of the core countries to the periphery is shifting from the private to the public sector.” (Full article here).
You have been “QE/LTROed”
You have probably seen many versions of this chart, but this one is probably the best self explanatory chart of the QE/LTRO dilemma.
Chart Scott Barber.
LTRO for bullfights-In Spain everything is possible
Another day on the Iberian Peninsula. The Trader has been writing extensively on the Spanish situation over the past year. The problems are now getting increased focus by investors, and we expect the Spanish situation to go much more intense over the coming months. The Spanish unemployment, debt levels, etc are one part of the problem, the other side is whether or not people actually know what is going on. “They” tell us the debt ratios are under control, buy simple not adding all relevant items. “They” tell us properties have bottomed out, but still there is probably over a million empty homes. “They” tell us the LTRO is great for the Spanish banks, but they use it for loans to bullfighting tickets. Espana, everything under the sun, especially indebted bullfighting tickets. From WSJ.
But by granting the new lease on life, the ECB program also has enabled the industry to delay its cleanup process, according to some bankers, investors and other experts.
“The LTRO has allowed for an extension of the period before which bank reconstruction is embraced, and the damage for the euro area could be material,” said Alastair Ryan, a banking analyst with UBS.
The tactics are most prevalent in Spain, where banks are awash in ECB loans but also are buckling under the increasing weight of bad real-estate loans. Lenders are making accommodations to small- and medium-size borrowers that take immediate heat off their customers, but possibly only kick problems to a later date.
What if the left tail is still around the corner?
What if the Greek mess is NOT fixed? What will happen if the drachma is reinstated? What if the LTRO has NOT fixed the European mess? Remember that the financial crisis did not end by JPM acquiring Bear Sterns? Insight by PIMCO’s Neel Kashkari.
JP Morgan acquired Bear Stearns over a weekend in mid-March 2008 with emergency rescue financing provided by the U.S. government. The financial crisis that first flared nine months earlier had been getting more intense. Did the near-failure of Bear Stearns mark a new, heightened phase of the crisis, or did it mark the bottom?
The Greek Deal
On the Greek “fix”, LTRO, haircuts and the new central bank tools. Video below.
LTRO-All you can eat
LTRO explained in a few minutes, while we await the new “free” money shortly.
Video below.
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