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Sunday, February 26

LTRO: The Ultimate Collection

This post will be updated (last 10-May 2012 GMT

This is arguably the largest or at least the most hand-picked post on the ECB’s LTRO on the web. Most of it is content that I have posted previously. First some random quotes and quick reads, followed by a huge timeline of blog articles, bank research etc. 

One of the best non-technical introductions is What is LTRO? by Macro and Cheese. LTRO is comparable to quantitative easing in US as it has resulted in a liquidity-driven asset price rally.

You can follow me on Twitter or Facebook and email me for suggestions and requests. I also have an automated publication based on the twitter feeds I follow at

Then to the readings:

From wikipedia:
On 22 December 2011, the ECB started the biggest infusion of credit into the European banking system in the euro's 13 year history. It loaned €489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent. This way the ECB tried to make sure that banks have enough cash to pay off €200 billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis. A second auction will be held on 29 February 2012.

Unnamed analyst from an unnamed bank, a comment that was later removed
Amused - Italian banks figured it out.  About an hour before LTRO results, 5 Italian banks issued and bought their own bonds. Presumably after posting these to the ECB, they receive proceeds of the loans which they in turn need to pay off coupons and redemptions, estimated across European banks to total €230bn in Q1. What Italian banks figured out is how to print money out of thin air! Abused - The €489bn take up of the LTRO by more than 500 banks came as a complete and utter shock to the great and good of strategists across the street. Apparently, few expected the Italian banks to game the system which in retrospect is precisely what the ECB was hoping for. They do not want banks going bust, they do not want a credit crunch, and they certainly do not want the economy dragged over the coals of a deep recession. Therefore, the estimated €190bn of new cash is largely not about piling into the Sarko carry trade, but rolling over debt. 

LTRO II: What the analysts are saying
24-Jan Nomura Rates Strategy: 36-month LTROs: A pyrrhic victory
…estimating €200-300bn. If the ECB communicates further LTROs we could see a reduced take up as banks would have further opportunities to access ECB funding. If it is as large, or greater in size, we think the result would be distinctly negative for European banks.

23-Feb Barclays FX Monthly: Turning of the tide
EUR has not weakened aggressively since the first 3y LTRO. In our view, this is partly because the LTRO was a response to increased liquidity demand. The second 3y LTRO is likely to be more of a liquidity supply shock and weaken the EUR.

24-Feb Merril Lynch Global Rates and FX Weekly: ML All eyes on LTRO II
We expect a gross LTRO take-up of €350-450bn, €150-250bn of which will be “new cash” (ECB balance sheet expansion). The market may be overestimating the positive long-term impact of the LTRO on peripheral government bonds.

23-Feb Credit Suisse FX Strategist: Greek solvency, the LTRO and the euro 
Expectations about the size of the LTRO participation have been scaled down in recent weeks, and because the size is entirely determined by bank preferences rather than the ECB, it reveals nothing about the policy outlook for the euro zone. What it does reveal is how much the healthy banks want to avoid any perceived stigma, and how much wholesale market funding the weaker banks have been able to replace by virtue of the LTRO being created. It says very little about the prospects for renewed funding stresses in the future, in the same way that an all-you-can-eat diner is unable to satiate its patrons beyond the day of the meal.

My thoughts on earlier posts
The 'SarkoTrade' 17-Dec – MoreLiver’s
LTRO, TROLOLO 20-Dec – MoreLiver’s
Bimodal Future – 4-Jan – MoreLiver’s
Addicts in Recovery 5-Jan – MoreLiver’s
The beatings will continue 6-Jan – MoreLiver’s
Weekender 7-Jan – MoreLiver’s
Assault on Default 25-Jan – MoreLiver’s
LTRO counterproductive? 31-Jan – MoreLiver’s

LTRO is what you want it to be 28-Feb – MoreLiver’s
Let there be credit claim collateralalphaville / FT
Goldman Sachs on the soon-to-be accepted collaterals. It will be of lower quality, of course.

More on the collateral crunchalphaville / FT
In other words, the collateral crunch facing banks continues — and that’s despite the ECB widening the eligibility criteria for collateral used in its funding operations last week. In the world of top quality eurozone collateral markets, meanwhile  – namely German bonds — things are getting even more stressed.

Germany, Not ECB, Must Buy BondsMarketBeat / WSJ
The Bundesbank as Europe’s lender of last resort is an unacceptable but unfortunately unavoidable end game for Berlin… This is why the Bundesbank, via the ECB, is desperate to get the IMF, China or anyone else on board. Bringing in an outside investor gets Germany off the hook.

How big could the Sarko trade go?alphaville / FT
Morgan Stanley research note: Adding together the various sources of potential demand for the December tender, we get a number that could be around €160bn-€250bn, with a further potentially large take-up at the February 3-year tender.

The Eurozone’s policy breakthrough?Interfluidity
If the ECB prefers that Italy “face market discipline”, it can quietly hint its concern and steepen the haircuts it imposes when the country’s bonds are offered as collateral. Banks will start to divest, replacing them with whatever the ECB favors.

Now That European Banks Have Money, Lots Of People Have Ideas For What They Should Do With ItDealbreaker
Since they’re now all flush and awesome, various people have come out of the woodwork to help them spend their money. (I’m happy to help too! Call me!) One possible answer is “bail out your reprobate governments,” which FT Alphaville have dubbed the “Sarko trade”…

The Corzine Trade vs French DowngradeTF Market Advisors
As banks rely on the ECB to fund themselves and to put on disproportionately large positions who will lend to them?  Who will buy the shares? At first it may seem good, but they will be at the mercy of the ECB and the politicians. With Greece the politicians have already shown a willingness to try to dictate policy for banks. The on again off again rumor of a financial transaction tax will come back.                    

Banks resist European pressure to buy government debtIFR
With bank debts coming due and most firms unable to raise fresh funds in bond markets – which remain largely closed – bankers say it is much more prudent to use ECB loans to pay off their own creditors rather than speculate that European governments pay back all their debt.

The euro crisis: Is everything fixed?Free exchange / The Economist
Banks around the periphery are in a difficult situation. If the sovereign fails, they fail and vice-versa. Given this, there might be some logic to a move to go all-in on the sovereign's debt: hope that funneling ECB loans into sovereign debt will take some pressure off the government, and that over time confidence will return and everyone's bets will turn out all right. On the other hand, markets and regulators are pushing against such a move, demanding that such banks raise capital and reduce exposure to risky debt.

ECB Liquidity: Back-Door Bazooka Or Suspension Of Democracy, BARCAP OpinesZH
BARCAP: Liquidity is needed to keep the patient alive for 3 years or so. But that's pointless if no surgery is done over that time to heal the patient. The surgery is now a go. The democratic experiment is over.

The carry trade and the goldilocks LTROalphaville / FT
European financials have deteriorated over the last week while the yields on
Spain’s government bonds have been coming in. Is this the result of banks buying up the high yielding bonds that they will soon be able to fund exceptionally cheaply? SocGen, Deutsche and RBC comment.

The ECB's XMas PresentResearch Ahead
More on the LTRO 3 year financing.

The ECB is making banks an offer they can't refuse: buy sovereign paperSober Look
1. It gets banks to buy material amounts of eurozone sovereign debt where the ECB is unable to do so.
2. It also slowly recapitalizes the eurozone banks by giving them an opportunity to make significant amounts of money over time without much capital usage.

What The TF Is Up With LTRO?TF Market Advisors
Adding to your sovereign debt positions means you really believe there is no risk of default, and that using the program, won’t lead to renewed pressure on your business from politicians.  I don’t see that happening.

Summary Of Wall Street Expectations For Tomorrow's Hail Mary LTROZH
Barclays, Brockhouse Cooper, Exane,
FTN, Monument, RBS and Unicredit oneliners.

LTRO Will Help Short-Term Funding, But Backdoor QE It Probably Is NotMarketBeat / WSJ
Roundup of views on the possible complications, i.e. why LTRO is not that bullish.

ECB’s Long-Term Repo Operation Credit Writedowns

A €360bn LTRO?alphaville / FT
Morgan Stanley suspects most of the money will go to refinancing banks’ expiring debts – perhaps only €20bn to periphery debt.

Will the 3yr EZ repo be a difference maker?Economic Musings
JPM estimates €200 bn of expiring repo to be rolled and €130bn of bonds maturing in Jan and Feb, a rough total of 350 bn.

Einhorn Trades Swaps for Shorts When Betting on Sovereign DebtTF Market Advisors
Is LTRO a way to have the ECB in control of ever more bonds in an attempt to make it more difficult to short bonds?  It would push shorts out the curve where they have to take more risk if somehow Europe fixes itself.

ECB's LTRO experience a cautionary tale for the FedHumble Student of the Markets
Market for collateral getting tighter, while banks cannot be forced to lend by providing liquidity. European experience should be a good lesson for the Fed thinking of QE3.

LTRO countdownThe Trader
The results on Wednesday will be judged on the total amount allotted at the 3-year tender, net of the amount shifted from the 1-year liquidity (out of €57bn) and from the maturing 3-month liquidity (out of €140bn).

3yr LTRO: Breaking or strengthening the banking/sovereign feedback loop?economistmeg
Rather than parking sovereign debt at the 3-yr LTRO window, it seems banks may increasingly take advantage of the lower collateral requirements to draw liquidity from the ECB. Banks may begin to issue their own debt, receive a government guarantee for it for a small fee and repo it in the longer-term LTRO window for cheap financing.

Carry, LTRO, Data, And VIXTF Market Advisors
The bonds can have a 0% risk weighting, but that doesn't mean anyone, including the banks, believe it.  The road to hell is paved with carry.  That is an old adage and likely applies here.

Banks Will Still Be Under-Capitalized, UBS Does The LTRO MathZH
UBS: it is highly likely that any term profit and loss improvement seen by banks will fall short of providing enough punch to resolve the issue of bank undercapitalization by the end of June 2012.

The ECB’s all you can eat cheap money buffet – a primeralphaville / FT
Rabobank’s preview. Morgan Stanley gave their yesterday.

Credit enhancement, Italian sovereign feedback-loop editionalphaville / FT
On ‘quality’ collateral manufacturing in
Italy ahead of LTRO.

ECB's 3Y LTRO Huge Demand: Safety, Not Risk-OnZH
 initial very brief risk-on, followed by risk-off.

LTRO use at €489.19bnalphaville / FT
523 bidders

What The Analysts Are SayingZH
‘massive’, ‘higher-than-expected’, ‘This is an invitation to buy government bonds especially for smaller, unlisted banks, which do not take part in the EBA stress tests.’

Summary - LTRO Represents 20% Of European Bank Deleveraging NeedsZH
Full link to Morgan Stanley’s Bank Deleveraging report (25-Nov)

Gross LTRO Liquidity Injection - €489 Billion; Net: - €210 BillionZH
SocGen explains why the €490 billion LTRO number is misleading and why, net of rolls, the actual new liquidity is about 60% lower.

Le TARPThe Reformed Broker
and so finally, the ECB (de facto Germany) has taken on the mantle of lender of last resort.  They will accept the toxic debt of the banks as collateral and throw money and anyone who needs it, just like the Fed did in 2008 after much hemming and hawing.  Just like we all knew they eventually would.

Classic Buy Rumor Sell Fact after LTROCredit Writedowns
The chief concern was that banks were running out of collateral and access to liquidity. That immediate problem has been addressed. To be sure, the crisis is not over. My "muddling through" hypothesis includes the ECB providing a backstop for banks (not sovereigns) in terms of liquidity.

LTRO apparently means buy the rumor, sell the fact!Saxo Bank
So without any significant improvement in sovereign yields, we are merely left with the fact that a whole lot of EU banks just got hold of a huge amount of effectively printed money – back door QE and therefore Euro negative.

What Does ECB’s Record Loan Mean for Europe’s Banks?The Source / WSJ
Comment round-up: more skeptical.

Citigroup Analyzes The Failure Of The LTRO ZH
The remaining mystery is why the sell-off is so severe.  One dose of cold water were comments from the Italian Bank Association that EBA rules won’t permit Italian banks to buy sovereign debt

Chart Of European Emergency Liquidity Back At Record LevelsZH
BofA: We also note that only 523 banks used the ECB’s first 3y tender, compared to 1121 banks in 20091. As we highlighted in our preview, this is overall indicative of banks’ reluctance or inability to engage in carry trades to the same extent as 2009. BAC: The tender results do not however change either our longer term cautious outlook on growth, or the periphery.

The ECB, eternal and infiniteFree exchange / The Economist
At some point won’t the leaders realise that lacking all private-sector confidence, their banks can no longer finance a growing economy? At that point, they will conclude the euro is not sustainable and prepare to exit, and the ECB’s limits will have been reached.

On Liquidity: Watch What the ECB Does, Not What It SaysCredit Writedowns
It says it will not backstop sovereigns, yet since it has renewed its bond purchases in August, its bond purchases have almost matched the new bond issuance of Italy and Spain.

The Eurozone Is Saved?Lance Roberts /
So, while these operations once again postpone the inevitable, they do not fix the economic problems of the debt laden countries. There has been no resolution that gets these economies growing again, reduces their debt-to-GDP ratios or increases their economic prosperity.

The ECB Long-Term Repo Operation is about price not quantityCredit Writedowns
In other words, the LTRO is an ECB tool that assists in setting the term structure of euro interest rates. It helps the ECB set the term cost of funds for its banking system, with that cost being passed through to the economy on a risk adjusted basis, with the banking system continuing to price risk.

Europe: Sofa Cushion-Diving For CashMarketBeat / WSJ
Good that banks finally found some money, but bad that they have had to look underneath sofa cushions.

Eurozone zombies follow Mario Draghi's cheap money – Reece / The Telegraph
Mario Draghi donned his plague suit on Wednesday and urged European banks to "Bring out your dead". But rather than financial corpses it was €489bn (£408bn) of zombie debt from zombie banks that emerged blinking into the daylight.

Herr Draghi or Signor Draghi, and the ECB's Santa RallyEvans-Pritchard / The Telegraph
Can the ECB doves engineer enough stimulus to head off disaster in Club Med, without causing a disgusted Germany to pick up its marbles and walk out. Probably not. And can any level of stimulus ever close the 30pc structural gap in labour competitiveness between North and South, still growing wider by the day? Certainly not.

How to avoid the ‘zombification’ of EuropeGeorge Magnus / FT
Needed: banking federalism in addition to a fiscal union, growth critical: by effectively binding banks and sovereigns even more closely together, (LTRO) is a roundabout route to nationalisation of sovereign finance, which ironically, makes fragmentation of the euro more likely.

On the ECB’s Long-Term Refinancing Operation and 2012 macro ideas for investorsCredit Writedowns
In sum, Europe is certainly a problem that will flare because the longer-term solution is a combination of credit writedowns, more bank capital, a lender of last resort and economic growth. Right now, the solution is no credit writedowns, maybe some bank capital eventually, some monetisation and economic anti-growth. Big difference.

Strategic Briefing: The ECB Lends After AllThe Capital Spectator
Summaries and links to eight articles analyzing the LTRO to death.

Q&A: The ECB’s three-year loansalphaville / FT
Basically a ‘LTRO for Dummies’.

ECB Bazooka is a fizzerMacrobusiness
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. If we see an additional €200bn turn up in the ECB deposit facility tonight then it is most likely that the banks have no interest in re-cycling that money through their sovereigns and the new year’s sovereign bond market is probably going to be ugly.

Italy Goes The Full MontiTF Market Advisors
Just a little statement that 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt.  The more I think about it, the more uncomfortable I get.

LTRO money deposited back to ECBSpiegel, ZeroHedge and ZeroHedge. LTRO money was almost all parked back to ECB. No wonder PIIGS bonds were again a case of “buy the rumor, sell the news”.

ECB Deposits Jump 10% More To Record EUR452BNZH
…since LTRO day, EUR187 billion of the 210 billion free money has been redeposited at the ECB.

ECB’s LTRO futile in stopping collateral contagionGordon T. Long
Long article, embedded scribd

Why Is The Euro Dropping? TF Market Advisors
The sad truth is that someone probably does know something, and although we may bounce back from this brief sell-off, none of the issues mentioned are going away and will need to be dealt with.

European Bank-to-Bank Lending Mistrust Hits Second Consecutive High; ECB's LTRO Won't Stop Collateral ContagionMish’s

Art Cashin Exposes The Behind The Scenes Panic In EuropeZH
UBS’s Cashin notes LTRO was almost useless and a risk of bank runs in Italy and Greece is growing.

Peter Tchir interviewed by BB on ECB, LTROThe Trader

Yes, the Market is Getting What it Wants. The ECB is Easing.MarketBeat / WSJ
Of course, you can’t escape the cyclical nature of this solution. The ECB is propping up the banks, and the banks  are keeping the euro zone governments afloat by buying their debt. If it doesn’t sound sustainable. And it might not be. But it seems that the markets at least see a path for muddling forward in
Europe, which wasn’t clear just a few weeks ago.

ECB LTRO: Before and AfterAlea
The ECB balance sheet increases, the banking system balance sheet doesn’t change. The ECB is just replacing the interbank market.
ECB LTRO: Target2Alea
Target2 balances cancel out on a consolidated basis, that is the counterpart of the LTRO is an increase in (ECB) deposits.
Deposits With ECB Decline By €30 Billion In New Year, Still Near All Time RecordZH
So at least some LTRO parking to ECB was due to the end of the year.

Would A Ponzi By Any Other Name Smell As Bad? Peter Tchir / ZH
On the collateral (”quality” bonds) manufacturing by Greece and Italy.

Belgium, Netherlands Complete Bill Auctions; ECB Deposit Facility Usage Soars To Second Highest EverZH
And speaking of the LTRO, that carry trade concept is now dead with the year end cash parking theory scrapped following the announcement thet banks parked the second highest amount in history at the ECB, or €446 billion, just shy of the €452 billion hit on Dec 27.

ECB: Large deposits do not imply that LTRO has failedDanske (pdf)

Would A Ponzi By Any Other Name Smell As Bad?Peter Tchir / ZH
This program seems to ensure the destruction of the entire banking system and the sovereign if any reasonably large participant fails.  We have gone for “sovereign ceiling” to “weakest link” in terms of credit.  If this program become common and larger, we have effectively linked all the banks in the system, and the sovereign, to the WEAKEST bank.

Espirito Santo Issues 3-Year Debt Guaranteed by Portuguese StatePeter Tchir
More crazy manufactured collateral for the ECB. Tchir: If the Japanese created the “zombie” banks the Europeans are perfecting them.

ECB provides unsecured funding to banks to keep them from failingSober Look
Originally the ECB had a strict limit on how much "related party" unsecured debt they can accept as collateral (usually only 5%). But with the credit markets frozen in the eurozone and bank bonds maturing, the ECB had to relax these rules.

ECB Loans Stabilize Market, Don’t Provide Much StimulusReal Time Economics / WSJ
Markets will scrutinize the ECB’s quarterly bank lending survey later this month for further clues about how much funds are reaching businesses and households in the form of new loans.

ECB Says Credit Crunch Averted; Yet ECB Overnight Deposits Again Hit Record High; Skyrocketing ECB Balance SheetMish’s
European banks are dumping sovereign debt at record levels on the ECB. Germany and France are on the hook. 10-year Italian bonds are down substantially, but the rate is still 6.5% with the ECB the buyer of only resort. Good luck with that policy as Europe heads into a massive recession.

The curious case of ECB depositsalphaville / FT
Bank of America Merrill Lynch analysts have taken objection to everyone interpreting high use of the ECB’s overnight deposit facility as an indicator of ‘bank hoarding’. It is just not so, they say.

Risks from ECB debt dripMacroScope / Reuters
DZ Bank on LTRO’s risk: obviously this also has a downside in that the average maturity of the debt is decreasing and that builds up a substantial rollover risk because all this short-term debt will become due in a couple of years.

The ECB has a communications problemalphaville / FT
Goldman Sachs thinks QE would introduce even more credit risk and thus not be very effective. Instead, ECB could set a plan and provide information on how it supports the bond markets and what happens to LTRO: how, when, who and how much.

$10 TRILLION Liquidity Injection Coming? Credit Suisse Hunkers Down Ahead Of The European EndgameZH
CS: February’s second 3-year LTRO looks set to be extremely large. Really extravagant claims (we have heard reports of €10 tn) are probably wide of the mark because this will not be a complete collateral free-for-all. On
Greece: What message would paying the 20 March in full on Greece’s behalf give to the rest of the periphery?

The ECB is Engaging in Massive QECredit Writedowns
And despite Draghi’s public statements, this time the central banks and governments are committed to move heaven and earth to prevent such a repeat.  Hence the $650 bullion three year ECB loan facility and more if it is needed (which doesn’t solve the underlying problem, but defers it for a long time)…

Nomura's Koo Plays The Pre-Blame Game For The Pessimism AheadZH
LTRO is largely a means of buying time and does little to address the underlying issuesnew higher capital rules come at a very inconvenient time… Just a matter of time before eurozone investors come to understand this concept and learn to ignore the views of rating agencies operating in ignorance of economic realities

Collateral squeeze as strong as ever, Icap saysalphaville / FT
ICAP: the collateral crunch hasn’t eased at all, except in Italy: Of course the fact that the Italian plunge coincided with the ECB’s LTRO three-year tender hasn’t gone unnoticed. If anything, the coincidence suggests that the idea to shovel huge amounts of Italian government debt out of the secondary repo market and into the central bank may have been orchestrated to suppress Italian (and Spanish) repo rates more than anything else.

LTRO Version 0.2TF Market Advisors
I expect full disappointment for that crowd.  I believe the next tranche of LTRO will actually be smaller than the first tranche!

The ECB creates artificial lifealphaville / FT
Citi believes LTRO has animated the corpse, but fundamentals are still bad: So don’t get wedded to this rally – the tighter we go, the more you want to move up in quality, not vice versa in a vain attempt to gain carry.

Death sanitised through creditalphaville / FT
The real point of LTRO was to keep secured lending in the interbank markets still working – with LTRO, ECB stepped in and became a “broker of last resort”. This helped the banks in their refinancing troubles and lessened the need to deleverage quickly.

Privileges and Immunities of the European Central BankECB (pdf)

Das KapitulationZH
JPMorgan’s research note: But the biggest market-moving event so far this year is undeniably the positive aftershock from
Germany’s capitulation on monetary expansion. The mechanism: the long-term refinancing operations (LTRO) of the ECB

Margin call, the LTRO movie alphaville / FT
Nomura’s research note: As the LTRO is a repo transaction the ECB takes in collateral in order to back any loans. This highlights one of the key differences from QE, which entails the asset risk being removed from the bank’s balance sheet and replaced with cash. Under the LTRO framework the economic benefit remains with the bank. (So what happens when the ECB makes a margin call??)

Go directly to the ECB, do not pass Go, do not collect €200alphaville / FT
ECB’s very first LTRO, by attracting the cheapest-to-deliver collateral (Greek debt), may have been a key catalyst in destabilising the Greek repo market…this time it could all lead to a withdrawal of funding on a much larger level.

The ECB’s bazooka has hit the targetBond Vigilantes
Those who doubt the sustainability of the ECB’s policies are entirely correct when they argue that  hurling liquidity at the Eurozone debt crisis does nothing to solve the structural problems at the heart of the Eurozone.  If you put lipstick on a zombie sovereign or zombie bank, it’s still a zombie. 

LTRO smackdownalphaville / FT
Our question really is not whether the LTROs were a liquidity game-changer but what comes next, especially if banks are mostly using the cash to pay off their own creditors but not for extending to the real economy…Buried in the ECB’s release on December’s monetary developments, for example, Societe Generale analysts noted the biggest-ever monthly decline in loans to the non-financial sector:

The ECB is Plugging HolesEconoMonitor
As each private funding market shuts down, the ECB compensates by relaxing its lending facilities and collateral rules, effectively shoring up bank liquidity… It’s pretty clear what the ECB is doing: plugging up the bank funding holes left exposed by private capital markets. What’s next?

Europe Needs a Real Fiscal UnionTim Duy’s Fed Watch
LTRO dramatically eased financial market tensions throughout Europe, revealing the important role of a lender of last resort.  But underneath those tensions exist some very real and deep economic and political fractures in the European economy.  And unless those fractures are quickly healed via a real fiscal union - not just an agreement to balance budgets, but a union in which rich countries transfer, not lend, resources to poor - the Euro experiment will be torn asunder.

Why An Outsized LTRO Will Actually Be Bad For European BanksZH
Takes from Nomura’s research note: LTROs are increasingly punitive and lead to subordination of senior unsecured bank debt… If the size is bigger than this, perhaps in the range of €500bn or greater, the effect on bank balance sheets in Europe will be distinctly negative in our view, and would make future wholesale and term funding from private sector sources significantly more difficult.

The Market Says CYA LTRO To Yesterday’s Negativity TF Market Advisors
The point is that moves of 125 bps aren’t that uncommon and aren’t a clear sign that LTRO is working.  What is clear is that the markets are thin, easily manipulated, or scared into big moves, but once the catalyst for that move is gone (ECB gets tired of buying, nothing from Grand Plan works, or LTRO is about prefunding debt not buying more bonds) the market has returned to focusing on deteriorating fundamentals.

European Sovereign Supply and LTROCredit Writedowns
Some argue that the LTRO will give banks a liquidity buffer to protect from the contagion of a potential disorderly default in Greece. Yet, the pressure Portugal has been under this month, especially since the S&P downgrade warns the ostensible firewall has been breached. The take away seems countries need the LTRO and investor confidence, especially investor confidence.

Investors: De-mystifying the Central Bank Balance SheetsA Dash of Insight
One of the many reasons that individual investors are scared witless (TM euphemism by OldProf) is a complete misunderstanding of the role of central banks and a distortion of current policies.

The ECB's tricky route to stabilizationFree exchange / The Economist
Using unconventional methods (LTRO), bond yields of countries not outside the sphere of hope came down. But bank lending did not improve.

Money for NothingMacronomics / MoreLiver’s

Why The LTRO Can’t Save EuropeMarketBeat / WSJ
BCA: The ECB’s LTROs can solve the banks’ refinancing needs for the next few years if they choose to take advantage. Yet the LTROs’ effect on peripheral sovereign debt is only indirect and is subject to the banks’ fickle appetite for risk.

Euro Banks Swap Cash for TrashTIME
Cheap loans being offered by the ECB to help reflate the Eurozone are encouraging some banks to boost their profits by loading up on risky bonds.

LTRO reduxSober Look
LTRO will spike the ECB deposit facility, reduce private repo financing and M3, esp. in periphery, weigh on bank balance sheets and making unsecured bank paper even less recoverable.

The Longer Term Refinancing Operations of the ECBECB (pdf)

UBS On LTRO: 'One More Is Not Enough' ZH
UBS: next LTRO will not be the last…The LTRO is likely to be different things to different banks in different countries at different times.

LTRO-ing, with Magnus alphaville / FT
UBS: anxious fixed income investors have been encouraged to re-benchmark or overweight again domestic sovereign bond positions, now that banks have access to plentiful and cheap ECB funding. Investors do not seem to have extended this behaviour shift to cross-border sovereign debt investing

Full Scenario Analysis Of LTRO 2.0 Size Implications ZH
Credit Suisse believes LTRO 2.0 will see a gross uptake of EUR500-650bn, notably above current consensus around EUR325bn.

Deutsche Bank Treasures Its Reputation (For Making Economically Questionable Decisions) So Much That It Turned Down Free Money Dealbreaker
…some of the classier European banks (DB, Barclays, Standard Chartered, etc.) have refused to take three-year 1% money against pretty cats-and-dogs collateral, not because they can necessarily get a better economic deal elsewhere, but…

European Nash Equilibrium Collapses - Bank Bailout Stigmata Is Back At The Worst Possible Time ZH
If everyone uses LTRO, fine. If only some do, those banks will be shunned by other banks, as they are “bad”.

Goldman Conducts Poll On Latest European Deus Ex, Finds Respondents Expect €680Bn LTRO Take UpZH
Nice charts and survey quotes from the GS note.

Is The ECB's Collateral Pool Expansion A €7.1 Trillion Imminent "Trash To Cash" Increase In Its Balance Sheet?ZH
Goldman Sachs’ previous analysis on the available collateral for LTRO.

Europe: "The Flaw"ZH
Credit Suisse: Debt is no cure for debt. What it can do is prevent a self-fuelling Fisher-style debt-deflation and it is clear that the LTRO has at least to some extent achieved that. And it can buy time such that, if the basic business model is restored, solvency can be earned. But we are not sure the business model has been restored; far from it.

LTRO Stigma Becomes Acute Days Ahead Of Second Operation ZH
there is a clear stigma being priced into LTRO-encumbered European banks relative to non-LTRO-encumbered (due to many aspects but most notably the implicit subordination of senior unsecured debt via collateralized loans to the ECB).

LTRO credit claims, not so carry trade alphaville / FT
JPMorgan: unlikely that there would be enough free collateral to support a €1tr repo, RBC: estimate revised from 1trn to 409bn

What is LTRO?Macro and Cheese
A nice intro to someone who recently fell to earth.

Another piece of the LTRO puzzlealphaville / FT
Reserve Bank of Australia’s assistant governor notes that money supplies of major economies are contracting and also that velocity of collateral has dropped

The new LTRO will boost TARGET2 imbalances - Bank of Italy exampleSober Look
The periphery NCBs in particular will build disproportionate amounts of such liabilities in order to provide more financing to banks in their countries.

The European OpprobriumMacronomics / MoreLiver’s
review our recurring theme the LTRO effect on credit.

ECB Preparing To Close Liquidity Spigot?ZH
Given the expectations priced into stocks (and remember credit has rallied but has recently started to weaken notably), any more hints by the ECB that LTRO 2 will be the last and that the liquidity spout is being shut down for now - leaving governments more responsible for growth - will not be taken well by the market.

Liquidity Floodgate Set to Backfire; Transmission Broken; Shutting Down the Liquidity SpigotMish’s

Diagram du jour: How the ECB transmission mechanism is brokenalphaville / FT
Nomura: In sum, it doesn’t appear that the interest rate channel has improved since 2008; a worrying conclusion given the myriad ECB unconventional policy interventions in that period.

Insight: ECB preparing to close liquidity floodgatesReuters
ECB wants its second offer of cheap ultra-long funds next week to be its last, putting the onus back on governments to secure the euro zone's longer-term future.

Will LTRO Spoil The Risk Rally?MarketBeat / WSJ
Mark Nash, a London-based bond fund manager for Invesco, says that while the LTRO was important in reducing fears of systemic risk, he also thinks any additional positive impact from the next LTRO will quickly fade.

Watch how the ECB acts, not it saysHumble Student of The Markets
Rumors that LTRO will be smaller, that it will be the last. Article thinks not true.

Entwining bailouts and eurozone central banksalphaville / FT
ECB and the Greek default, the second LTRO. EZ central banks, governments and banks are becoming very, very tangled.

LTRO programs' impact on sovereign bond purchases by banks Sober Look
So far the 3-year LTRO facility seemed to have only a limited effect on sovereign bond purchases by EU banks, though it may have helped stem the accelerating bond sales. 

German people zero in on TARGET2 imbalances; may derail ESM increases Sober Look
A rising trend and a big spike in late February, probably from Frankfurt.

LTRO programs' impact on sovereign bond purchases by banks Sober Look
So far the 3-year LTRO facility seemed to have only a limited effect on sovereign bond purchases by EU banks, though it may have helped stem the accelerating bond sales.

At the ECB, the Tweak That Quietly Saved the Banking SystemNYT
Then the total amount was fed to the E.C.B.’s market operations room, an open-plan office on a lower floor of the E.C.B. building in
Frankfurt. Employees sit at desks separated by low partitions, scrutinizing multiple data terminals. There is a large flat-screen television overhead tuned to Bloomberg News, and a hand sanitizer near the entrance. Until the last minute, at least some people within the E.C.B. doubted whether the offer would resonate with banks.

The (European) Placebo EffectPeter Tchir / ZH
What is being ignored is evidence that banks are hoarding most of the LTRO cash for future debt repayment, growing concern that senior unsecured lenders to banks are becoming too subordinated by the ECB, changes in laws designed to hurt bondholders, growing concern over ECB’s SMP holdings – both as a form of subordination to other bondholders and a source of real risk to the countries backing up the ECB.  Very little has been fixed and in fact progress has slowed down on some things.

LTRO 2 101: Top-DownZH
SocGen expects 300-400bn: The LTRO cannot be completely separated from another key event, just a couple of days later: the EU 1-2 March Summit. A large LTRO and a 50% increase to €750bn of the rescue mechanism would be 'risk-on' (would also make us heavy sellers of Bunds vs swaps)

LTRO 2 102: Projected LTRO Take Up By BankZH
Draghi said there is no stigma trade. We proved him wrong, at least in the interim. LTRO 2 will finally decide who is right and who is wrong.

The euro, the L-throwalphaville / FT
Views from Morgan Stanley and Credit Suisse, all their scenarios are either euro neutral or negative.

The “L-troh”, the credit crunch, and the carry tradealphaville / FT
Views from Nomura, SocGen and RBC. Alphaville comments: this is more about propping up banks and ailing peripheral sovereigns…The increased uptake from Italian and Spanish banks is the real message though, and it looks like both will be back in force for round two.

How Banks Will Use This Week's 3-Year LTRO BI
SocGen has a roundup of how banks -- through media reports and publicly stated intentions -- intend to use this operation.

Here Is Why Someone Will Be Disappointed By The LTROZH
Goldman Sachs surveyed its clients and found a gaping divide between banks and investors with the latter expecting considerably more than the banks - it seems someone will be disappointed - investors hope for more and banks expect to do less.

ECB wall of cash averts credit crunchReuters
The euro zone avoided a credit crunch in January but banks showed scant sign of lending on the funds they snapped up at the European Central Bank's first 3-year lending operation to companies which have been starved of investment funds.

The grass is always greener: UK banks, the ECB and the LTROopeneurope
RBS and Lloyd’s are considering borrowing… this is actually not new. RBS (€5bn) and possibly HSBC accessed the first LTRO back in December when there was little furore over the process and there has been little fallout since.

U.K. Banks Weighing Next LTRO for Low-Priced FundingThe Source / WSJ
The only major U.K.-based bank to have so far ruled out accessing the next round of LTRO is Standard Chartered PLC. A spokesman for the emerging markets-focused bank said that it didn’t need the funding.

Waiting for LTRO: A Play in Two Acts Macro and Cheese
My best guess is that the size of the operation surprises to the upside, but following an initial push up, the market stalls and either declines, or fizzles out into unchanged territory.  After that, the onus is on the bulls.  The market has come awfully far on the back of EUR 200 billion in net LTRO I loans.  Without a barnburning second act, beware of flying tomatoes.

Press release: Eligibility of Greek bonds used as collateralECB
…temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations.

Morning BriefingBNY Mellon
LTRO II is to be welcomed, but a means to an end and certainly not without risk.

How much ECB liquidity morphine will banks demand?Saxo Bank
The delicately balanced internal politics of the ECB mean that Draghi will surely be hoping for a 'Goldilocks' take-up for LTRO2. Not too large, such that the Bundesbank becomes even more worried that small or medium-sized banks are being turned into liquidity 'addicts', (and that the pressure on fiscally errant governments to reform will be reduced too quickly), and not too small, so that the LTRO does not have the desired effect.

The Final LTRO Preview - Bottoms UpZH
SocGen’s analysis final part

It Begins: ECB Calls For Bids In 3 Year LTROZH
the banks that are found to use the ECB's Discount Window should prepare for major stock pain, as the market, devoid of easy targets, focuses on them next as the European stigma trade becomes the hedge fund divergence trade du jour.

ECB + LTRO = Mr. Creosote?Macro Man
humor: It's time for the European equivalent of the US Non Farm Payrolls Lottery. Roll up and guess a number.

Differing views of LTRO resultsThe Big Picture
How the actual number can be interpreted in many ways.

Here’s What To Expect From Another LTROMarketBeat / WSJ
Barclays customer survey shows that European banks believe in smaller LTRO than other customer types – overblown expectations?

When 500 billion euros no longer pops eyesMacroscope / Reuters
…a clear pattern has emerged in the forecasts of money market traders attempting to gauge their size. They have consistently underestimated the size of a given new loan tender the first time it is offered, only to overshoot on subsequent operations of the same maturity.

Fitch on who’ll tap the LTROalphaville / FT
About the same share of participation expected as in December. Greeks have no collateral, but Italian banks enjoy wider collateral eligibility.

Research: ECB: LOTRO - Danske Bank (pdf)
300-600bn, large amount leading to risk rally

LTRO 2.0 €530bn - alphaville / FT
250-300bn (another view 444bn) of new cash, high number of bidders suggesting little stigma

LTRO 2 - The Goldman Take - ZH
Has good charts. While the focus is on the aggregate take-up, we see country aggregates as arguably more important. Over the course of the next weeks, we will get disclosure of country aggregates where we expect the Spanish and Italian take-up figures to be high.

Banks gorge on 530bn of ECB 3-year funds - Reuters
Much will now depend on what banks do with the cash. They used a big chunk of the 489 billion euros they borrowed first time around to cover maturing debt and have been parking close to half a trillion euros at the ECB in overnight deposits…ECB said to want this LOTR to be the last?

Euro-area banks tap ECB for record amount of three-year cash - BB
RBS: helps keep tail risks for European banks at bay in the near term…do not address the underlying solvency issues, and ultimately funding stresses can quickly return.

ECB's second three-year loan may be last - BB
The ECB has “every incentive” not to offer any more long- term funding, UBS analysts including Alastair Ryan said in a Feb. 22 note to clients. Providing money for so long against a broad range of collateral threatens its balance sheet and could encourage politicians to slow their austerity pushes, they said.

Instant View: Demand at ECB's tender exceeds first round - Reuters
Short commentaries from several analysts

Early reaction to LTRO not to be trusted - Saxo Bank
Steen Jakobsen: …whether this is the “final” LTRO as indicated by ECB, or not, will become the true indicator. If this was the last one then history tells us that ending access to extremely easy money should see risk-off. If, however, the market sees through the ECB and knows they will do more as the economic situation deteriates, then this is merely another step towards explosion of the ECB balance sheet.

ECB allots €529.5 billion - WSJ
"The first LTRO was essentially to get rid of the wall of banking debt," Bank of France Governor Christian Noyer said in an interview. "The second LTRO will be more about lending, as it could bring enough funds for banks to be proactive."

Europe's central bank and the euro crisis: Draghi strikes back IIFree exchange / The Economist
At best, the second LTRO will maintain that return of confidence for a while. But the ECB’s provision of liquidity buys time rather than solving the euro area’s deep-seated problems, which are as much political as economic.

If only we had an exit poll of European bankersThe Big Picture
With Draghi’s job now done for a while as there are no more LTRO’s on the docket and interest rates will likely stay at 1% next week, Bernanke takes the economic/monetary policy stage at 10am. I expect him to cover all his tracks and thus don’t expect anything new of interest.

LTRO Doesn’t Solve Europe’s Key ProblemsMarketBeat / WSJ
True, the ECB loans averted a nasty credit crunch and easier financial conditions will provide some support to the real economy. But banks are unlikely to use LTRO money to fund new loans to businesses and households which typically have maturities beyond three years; most banks will anyway continue to deleverage to meet new capital rules. Any lasting boost to the real economy will depend on banks and governments pushing ahead with restructuring and reforms to boost productivity and competitiveness.

Looking Like LTRO Is A “Sell The News” Type Of Event?TF Market Advisors
Good or bad that more banks took it up? Is this the end of free money from the ECB for now?

Dear Santa, I Know Christmas Is A Long Way Off, But…TF Market Advisors
That is when investors who have ignored all the games being played with sovereign debt, and potentially with bank debt, will become concerned.  Those who have been concerned will be saying “I told you so” rather than buying bonds.  Then the question is will fresh announcement of EFSF, ESM, LTRO, SMP, or whatever else, do much?  Yes, yields are low, but the opportunity cost of sitting in cash is extremely low as well.

LTRO? Check. Bernanke: spoiler or punch-dispenser?Saxo Bank
It is interesting to note in the wake of the LTRO that Portuguese 10-year yields spiked back above 13% and that rumors surfaced that the ECB was out buying Portugues bonds in the secondary market.

LTRO 2 and better-than-expected US GDP, so what?Saxo Bank
The LTRO has removed the risk of bank runs and contained the fallout of a more and more asymmetric trend in demand deposits throughout Europe. Nevertheless, it has only bought time and Europe still need to reform its broken welfare state model if it wants to restore competitiveness again.

€529.5 Billion Gross, €311 Billion Net; Discount Window Stigma ResurfacingZH
It also means that in three years Europe's bank will have to not only pay the ECB €1 trillion in case (assuming there is no perpetual rollover of the LTRO, which there will be), but also delever by another €2.5 billion, for net asset drop of €3.5 trillion. Good luck building up shareholder equity by the same amount to offset unchanging liabilities.

With LTRO Out Of The Picture, Portugal Is Back In Play - Bonds SlidingZH
Portugal has exploded over 100bps wider (and almost 70bps of that today post-LTRO) to back over 1200bps wider than Bunds.

Ponzi perpetuation, roll out the printing presses: LTRO, ECBSaxo Bank
Profanities, not safe for work

LTRO.2 €530bn (update)alphaville / FT

LTRO and FED: How to read a central bankFree exchange / The Economist
Stocks declined on the testimony, but that’s as it should be: in a normal recovery, stocks are tugged higher by earnings and lower by rising bond yields. If that seems strange, it’s because recently it hasn’t been true. In a liquidity trap, interest rates mean little to stocks because they’re always assumed to be zero.

PM Dear Dairy: Good RiddanceMacro and Cheese
The guilty party is LTRO, or rather, the end of the LTRO party.  After a relentless double-digit global equity advance over the past ten weeks, markets woke up and realized there's no there there.

LTRO: What It Meant, What It MeansMacro and Cheese / Seeking Alpha
…more widely dispersed than the first LTRO of December 21 was, reaching 800 institutions vs. 523 banks…

LTRO Lubricates Bond AuctionsMarketBeat / WSJ
Spain had a big bond auction this morning, and plenty of bidders showed up… After the last LTRO, banks took huge chunk of their new cash and parked it at the central bank. Some will surely do that again, but to what extent?

The Bank Of Pete, Or Of Any Tom, Dick, Or HarryTF Market Advisors
Maybe I’m wrong, but once a central bank has gone from being a bona fide lender of last resort to a gift giving enterprise, shouldn’t it become part of the government?

Legal & General’s Grodski Says LTRO Not Funding EconomyBB (mp3)

Disquiet within ECB laid bare after cash injectionReuters
Some ECB policymakers are alarmed that a dramatic loosening of lending policy stemming from a 1-trillion-euro wave of cash unleashed into the financial system will fuel imbalances in the euro zone and stoke inflationary pressures. 

Draghi Bazooka has not yet stopped Club Med money collapse The Telegraph
The ECB action is leading to structural subordination of all other creditors, degrading the bonds of weaker banks – some of which will soon be reduced to junk status. The Draghi LTRO reduces the likelihood of defaults, but increases the losses should it happen.

Barclays taps ECB for €8.2bn of cheap moneyThe Telegraph
Barclays tapped Europe's central bank for €8.2bn (£6.8bn) of cheap funding this week, marking a U-turn for the bank as it had been worried about the risk of political interference from taking funds.
Italy shaky despite ECB moneyIFR
Italy has completed 10% of scheduled issuance for 2012, while
Spain 35%: “Ultimately the LTRO won’t be enough without real structural and institutional change in Italy,” said the European head of debt capital markets at one US bank, who has in the past run debt deals for Italy. “This is a real problem. The pool of money inside of Italy is not enough.”

They’re back! (thanks to Ltro 2)alphaville / FT
We’ll get some insight into what the banks actually did with the Ltro funds via the March lending survey, and banks’ quarterly filings on sovereign bond holdings.
Weidmann’s ECB agitation more dangerous than WeberBreakingviews / Reuters
Weidmann is worried that collateral which the ECB is accepting from banks in return for its massive liquidity injections isn’t sufficiently good – and that strong national central banks, such as his, could be on the hook for losses.

Euro zone crisis over – for nowBreakingviews / Reuters
…a commitment by governments to fiscal discipline across the euro zone has enabled the ECB to give banks ultra-cheap funds. But the contagion demon is dozing, not dead.

Credit Guest: Modicum of reliefMoreLiver’s
by Macronomics: most of the PIIGS improvement came from PIIGS banks utilizing the LTRO, not the more "sound" core country banks. Thus a look at the systemic risks is in order.

EONIA rate averaging due to the 3Y LTRO’sSober Look
The end result is that ‘Euro-core’ has an ‘accommodating’ monetary stance with low lending rates and excess liquidity, while the periphery faces an effectively ‘restrictive’ monetary stance while it needs exactly the opposite.

The issue with LTRO-II is not the spike in Deposit FacilitySober Look The issue with LTRO-II is therefore not the spike in the Deposit Facility. It is with the fact that Eurozone periphery (plus French and Belgian) banks end up using far more of the facility than banks from the "core" (particularly Germany). 

Unintended ConsequencesJohn Mauldin / The Big Picture
Peter Sands, the head of Standard Chartered (a British commercial bank), warns that the new money runs the risk of “laying the seeds for the next crisis.” He wonders what happens in three years’ time when all that debt needs to be refinanced. That seems a reasonable question, as finding a spare €1 trillion will not be a lot easier in three years.

Wall Street’s weekend LTRO conversation: Stealth sovereign bailouts ZH
SocGen, Citigroup views

The LullMark Grant / ZH
LTRO, Greece, Portugal and possibly Spain, France, IMF & Europe. 

ECB liquidity is not a free lunchGavyn Davies / FT
Some observers point to the danger of a zombie banking system, kept alive artificially as a wing of the central bank. And, in a much-publicised “private” letter to Mario Draghi in February, Jens Weidmann, Bundesbank president, expressed concerns that the latest two LTROs will expose the ECB to potential losses which will undermine its capital base.

Central bank policy driving corporate spreadsSober Look
Barclays: The start and end of each major accommodation tends to be near the inflection point in the credit markets.

What is the ECB endgame?Marginal Revolution
How long would it take for de facto bank nationalization to lower the economic growth rate?  How long would it take before re-privatization is an option? By the way people, we’re exploring the best case options here, they did avert disaster in December!  For now.

ECB Financing to Portuguese Banks Rises to 47.6 Billion EurosTF Market Advisors
I’m not sure if this includes LTRO2 or not, but definitely doesn’t count government bonds held as part of SMP.

Vampire Squids, Zombie Banks, and Caminhada Banco MortosPeter Tchir / ZH
These seem to be the 4 largest banks in Portugual and any other large presence seems to be subsidiaries of Spanish banks. So the total market cap of these 4 institutions is €4.2 billion market cap and total assets of €233 billion. These banks are likely getting the lion’s share of the €48 billion of ECB money.  That would imply 20% of their funding is coming from ECB programs?  That doesn’t include LTRO.

European Credit Signals LTRO IneffectivenessZH European credit markets, which are now trading at their worst levels post LTRO are much more concerned at the unintended consequences of the massive subordination and dependency than the equity market appears to be.

Rift Grows Between Germany's Bundesbank and ECBSpiegel
There are growing divisions among ECB leadership about how to handle the euro crisis, not to mention between the ECB and the Bundesbank. While Mario Draghi is pleased with his recent decision to flood the markets with cheap money, Bundesbank President Jens Weidmann warns of the dangers.

Is Jens Weidmann Right About Bundesbank Target2 Risks?Credit Writedowns
The most likely resolution of Target imbalances in the case of a full Euro breakup would be a pooling of assets held by Target2 debtors to be handed over to Target2 creditors to settle the balance. This may leave the Bundesbank holding a set of peripheral-originated assets that may be worth less that face value but this scenario would result in losses to the Bundesbank that would be far short of the current value of its Target2 credit.

Getting hookedButtonwood’s / The Economist
…any spare bank assets that aren't nailed down are pledged to the central bank. Any interbank lender would be behind the ECB in the queue should the worst happen. That's why a lot of money is placed back at the ECB; it may not pay much interest but it's safe. So instead of a once-thriving interbank market, we now have a lot of commercial banks that are "wards" of the ECB.

BizDaily: The next credit crisis?BBC (mp3)
EZ banks on life support, will there be another credit crisis? ECB hopes LTRO-financing will save the day. Plus,
Canada’s strict banking regulations and Burma’s new dawn

European Banks Now Face Huge Margin Calls As ECB Collateral CrumblesZH
as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties… increase in margin calls can only further exacerbate the stigma attached to LTRO-facing banks

Fed economists slam TARP (LTRO?) in a paper measuring the rescue fund's effect on risk-taking at TBTFsZH
Interestingly, the TARP banks were less capitalized than the non-TARP banks prior to the infusions, but became relatively less capitalized after the infusions. This suggests that these banks suffered larger losses in the later period of the sample.

Monetary blanks in the Eurozone alphaville / FT
Nomura: additional liquidity in Europe is currently translating into additional government bond buying rather than real-world lending For recovery to take hold, Koo says, capital rules would either have to be relaxed or public funds would have to be injected into banks. Lacking that sort of action, liquidity will otherwise continue to head into government bond markets. In fact, as long as private borrowers remain scarce, Koo believes government bond yields will continue to stay compressed.

European Banks Now Face Huge Margin Calls As ECB Collateral Crumbles ZH
as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties… increase in margin calls can only further exacerbate the stigma attached to LTRO-facing banks

Ultimate Carry Trades – AIG, MF Global, And LTROTF Market Advisors
LTRO has variation margin and the banks have disproportionately large positions in the debt of their country. (What could go wrong?)

LTRO – Scratching The Surface TF Market Advisors
If the collateral a bank has posted declines in value, the banks would have to post additional collateral.  This is a big deal.  Somehow the world seems to have an image that banks can borrow 3 year money at 1%, pledge an asset against it, and let the carry take effect with no other consequences.  That is far from the truth if variation margins are being used.

LTRO subordination of senior unsecured debt in the Euro bank funding marketZH
According to Barclays, average encumbrance across banks has risen dramatically to around 21% of assets. German banks, which are actually less encumbered than in 2005, and those in Finland, which are roughly around the same levels, are the lone exceptions in the eurozone… This suggests that there could be on-going pressures on banks to reduce wholesale funding reliance via balance sheet shrinkage – the very thing that the LTRO was designed to prevent.

Presenting Europe's Schizophrenia Post LTROZH
Since Draghi's second savior LTRO, European markets have been flip-flopping gradually lower. These four charts do not seem to suggest a market that is confident about tail-risk containment, sovereign firewalls, or an orderly restructuring by Greece.

Ex-ECB's Stark Says ECB's Balance Sheet "Gigantic", Collateral Quality "Shocking"ZH
Former ECB executive board member Juergen Stark adds: the structure of the balance sheet is a cause for concern because increasingly short-term debt claims are being replaced by long-term ones and this will make it more difficult for the bank to reverse its loose monetary policy.

Why JPM Sees A "Lot More Printing" By The ECBZH
JPM: The ECB may need to print a LOT more…the net balance of payments in the periphery shows money flowing out and ECB financing covers these flows only partially. More will come.

Germany Turns Up Pressure on ECBWSJ
Growing more confident that the acute phase of the euro-zone debt crisis may be passing,
Germany is beginning to put pressure on the ECB to start mopping up the extra cash that it has flooded into European markets to stem the spread of financial contagion. h/t Alea

All of Europe's a stage... – All of Europe’s a stage…Humble Student of The Markets
Draghi's message to the politicians was, "We've done our part, it's time for you to do yours" as he hinted that not only would there be no further LTROs, but the next ECB step would be some form of tightening. How much of that is to be believed?

Encumbrance 101, Or Why Europe Is Running Out Of AssetsZH
Barclays: Whether it be their direct actions with Greece (specifically subordinating the world) or their indirect actions with LTRO collateral needs, the systemic risk of Europe's banking/sovereign credit system is far higher now than it was before…

BIS Quarterly Review, March 2012BIS
discusses global impact of European bank deleveraging. The March issue also provides highlights from the latest BIS data on international banking and financial activity. Press release here

Mark Grant On The Increased Risks of Owning European Sovereign/Bank DebtZH
For those of you who are more aggressive and want a bigger play then I suggest shorting the debt or equity of the European banks. My best picks here are Spain, Italy and France.

LTRO names n’ numbers, revisitedalphaville / FT
UBS: We (have) discussed…how usage approaching 10% of a bank’s funded book could represent a tipping point beyond which counterparties and investors would likely regard the bank as one unlikely to be run as a typical private-sector enterprise.
Is The ECB Masking Accelerating Deposit Flight In Italy And Spain? ZH
Spanish and Italian (SPIT) banks dominated the use of the ECB's LTRO facilities, while Finland/Germany/Luxembourg (FINGEL) banks took only modest amounts... but the rise in the ECB's deposit facility shows that FINGEL dominated the additions while SPIT increased only very marginally...

Is Another Record ECB Margin Call Impairing Gold Again?ZH
ECB has increased its margin calls on European banks by EUR162 million this week to another record high of over EUR17.3 billion.

"Spain Is Fine" - February Spanish Bank Borrowings From ECB Rise To RecordZH

Reflections on Buying Time: Did the ECB Buy Time? Time For What? Mish’s
I must point out that for a time, Trichet appeared successful in containing Greece. However, time is fleeting. History will show that the ECB did not buy time for anything but a bigger disaster, just as happened with Greece.

Transmission Channels PIMCO
By loaning an almost unlimited quantity of euros to European banks against a wide range of collateral for three years at attractive rates, the ECB has largely taken the near-term risk of a European bank failure off the table…the ECB’s LTRO program is only directed at managing one of these transmission channels: the banking system. The other transmission channels are largely unprotected today.

LTROsophy 101alphaville / FT
…if such an improvement does not materialise, the ECB may get under renewed criticism for having addressed a solvency problem with a liquidity solution. Indeed, it may actually reduce the chances of a third LTRO, forcing the ECB to rethink its unconventional policy strategy.

Two Charts On Why The LTRO Is A 'Real' FailureZH
Morgan Stanley’s two charts tell about lower corporate credit demand and  tighter credit supply by banks.

The ECB swallowed the marketGolem XIV
My guess is that as this year progresses banks will quietly bring rubbish back on to their balance sheets from off-balance sheet vehicles just so they can be slipped into the ECB. These would be assets that were declared worthless and written off for a tax rebate in the country of origin, before being moved to an SIV in Ireland where they would be declared at face value so as to be written down again and then pledged to the ECB at far above their real market value in return for an ECB bond which can be used to speculate against various nations and their debts.

In the Eye of the Stormeconomistmeg
Three time-buying muddle-through tools discussed: bailout programs, LTRO and firewall: The cycle of boom and bust is such that at some point the euro area will hit another economic and/or financial shock. But the troika’s current crisis-resolution approach of extend and pretend will have done nothing to position the Eurozone to survive such shocks any better in the future.

LTRO Stigma Reaches All-Time HighZH
The spread between LTRO- and non-LTRO banks increasing: ECB margin calls and subordination effectively closing banks from issuing bonds

Has the ECB hit a limit?
 “Should the inflation outlook worsen, we would immediately take preventive steps”. This column argues that these are brave words given that the ECB has hit a limit in its ability to prevent an acceleration of inflation.

Europe Drops Most In 3 Weeks As LTRO Stigma Hits New HighsZH
Good chart roundup of the recent moves: The LTRO Stigma, the spread between LTRO-encumbered and non-LTRO-encumbered banks, has exploded to over 107bps (from under 50bps at its best in mid Feb when we first highlighted it)

LTRO, interbank stress and banks’ stock prices: a conundrum?Bruegel
This result suggests that the ECB helped ensure the funding of banks but did not bail-out banks. As would be expected with refinancing operations, the ECB will only step into a loss after the value of the collateral and the value of equity is exhausted. Seen from this angle, the ECB helped the financial system’s stability but not the shareholders of banks.

Euro Area Credit: Did the ECB Wait Too Long?EconoMonitor
However, with the domestic drag in periphery credit markets already underway, and limited upside potential to global demand for exports, one questions whether or not the the ECB waited too long (given the long lags in monetary policy). 

Eurozone money market funds, a melting ice cubeSober Look
Because of LTRO, a massive reduction in the availability of short-term non-government paper…This is creating difficulties for euro denominated money market funds.

Bundesbank tries to cap periphery exposure as TARGET2 claims spikeSober Look

Letter from the ECB President to MEP Giegold on LTROsECB (pdf)

The ECB’s proportionate response to the Eurozone
The ECB’s longer-term refinancing operations have been widely analysed. Although comments are largely positive, some experts have argued that direct ECB intervention was the only way to save the Eurozone. This column reviews the criticisms against the operations and assesses whether the ECB should have intervened directly in the sovereign-debt markets instead of providing funding to banks.

ECB cheap loans no substitute for reforms, Draghi warns - euobserver
Draghi admitted that all the "fiscal consolidation" measures are worsening the recession that has gripped the eurozone, but insisted that this was the only way to get back to "sustainable growth" in the longer term.

The Big EasingProject Syndicate
Daniel Gros: The real problem for the ECB is that it is not properly insured against the credit risk that it is taking on. The 0.75% spread between deposit and lending rates (yielding €7.5 billion per year) does not provide much of a cushion against the losses that are looming in Greece, where the ECB has €130 billion at stake.

LTRO Failure Full Frontal As Spain 10 Year Approaches 6% AgainZH
Nice and very quick chart attack.

Spanish and Italian banks underwater on their LTRO-funded bond purchases?Macrowonders

The Euromess is back! But it never really went away in the first placeWonkblog / WP
ECB might have trouble staging another intervention, even a temporary one… “The Germans swallowed a lot when it created the ECB, and if Germans signal profound unhappiness with the ECB could fundamentally break the political bargain that holds the ECB together,” Farrell says.

LTRO operation is pushing Spanish banking system closer to collapseCredit Writedowns
Looking at what’s happening now with Spain, you can see extend and pretend is going down the same route it has done in Greece , Portugal and Ireland. But, of course, Spain is too big for any of the EU’s bail out funds. It will all boil down to whether the ECB writes the check.

You Can’t Spell Spain Without ‘Pain’MarketBeat / WSJ
It is possible, BCA says, for Spain to avoid Greece’s fate, but it comes with lots of caveats… Even with the LTRO, BCA sees struggles ahead for Spanish banks, which, it can be argued, are much more entangled in the country’s woes than Greek banks were.

How Much LTRO Dry Powder Is There, And Why Spain Is Again The WildcardZH
Deutsche Bank: Spain has completed €40.5bn out of the estimated €86bn in issuances so far with €45bn expected in redemptions, leaving them essentially flat for the year. Italy on the other hand has completed €74bn out of the estimated €232bn in issuances so far with €128bn in expected redemptions, leaving a net issuance headroom of €30bn

LTRO operation is pushing Spanish banking system closer to collapseCredit Writedowns
Looking at what’s happening now with Spain, you can see extend and pretend is going down the same route it has done in Greece , Portugal and Ireland. But, of course, Spain is too big for any of the EU’s bail out funds. It will all boil down to whether the ECB writes the check.

The Spanish sovereign-banking loopOpen Europe
The unlimited ECB lending and the LTRO has only exacerbated this cycle and there is a strong correlation between increased reliance on ECB funding and the sovereign-bank loop – Spanish bank borrowing from the ECB jumped by €75bn in March, an increase of 50%.

ECB Seen Favoring Bond Buying Over Bank LoansBB
Of 22 economists polled this week, 17 predicted the ECB will be forced to resume the Securities Markets Program (ECBCSMP), while only one forecast it will offer another batch of three-year cash. Nine said the central bank may consider shorter maturity loans of one or two years.

How The ECB Is Turning Spain Into GreeceZH
ING’s piece: bulk of the LTRO2 proceeds were taken down by Italian (26%) and Spanish (36% of the total) and the latter is even more dramatic given the considerably smaller size of Spanish banking assets relative to Italy. The hollowing out of the Spanish banking system, via encumbrance (ECB liquidity now accounts for 8.6% of all Spanish banking assets), is a very high number - on par with Greek, Irish, and Portuguese levels around 10%.

LTRO Bank Stigma Widest Since LTRO AnnouncementZH
and the 3Y EUR –USD swap basis is dropping, just like in last August and November.

consumer and residential delinquencies are flat, despite a surge in unemployment. I recommend taking this data with a giant grain of salt, given what one would normally expect. Markets are doing exactly that, which is why Spanish banks trade at less than tangible book value…

LTRO, bond purchases or both, which is it to be?Macro Matters
I mean come on, who can justify 22.8% unemployment in a developed economy such as that of Spain? If fiscal transfers are not the answer, then monetary policy surely is. Just a thought.

The bank-sovereign linkage in the EurozoneSober Look
The periphery banks are now inextricably tied to the path of their nation's sovereign debt. One of the things that made the Greek bond restructuring so difficult was the fact that the Greek sovereign bond write-down instantly made Greek banks insolvent. Greece had to use €50 billion of the EU financing just to recap the banking system. This issue has become acute in other Eurozone nations.

German tempers boil over back-door euro rescuesThe Telegraph
Controversy is raging in Germany over soaring "payments" by the Bundesbank to shore up Europe's monetary system and cope with a tidal wave of capital flight from southern Europe.

The dangers of a bloated ECB balance sheetMacroScope / Reuters
Market participants say that it would take a long time for these dangers to filter through to financial markets – if they ever do. They say the central bank has unlimited scope to provide liquidity and print money… But others have begun raising concerns. And if the extreme scenario does materialize, things in Europe could quickly deteriorate.

How Spain pays the piperEconomic Musings
The problems and the possible solutions (SMP, LTRO, debt for equity swaps) discussed

Italy's and Spain's central banks plugged a €131bn balance sheet hole, with TARGET2Sober Look

How Much Bigger Can TARGET2 Imbalances Grow? Goldman Answers: "A Lot"ZH
Goldman Sachs: The ECB’s two 3-year LTROs should have, all else equal, reduced the capital flight from periphery to core to the extent that fears of an immediate liquidity crisis of the banking sector in the periphery were a major driving force behind these flows. There is little evidence, so far at least, for this. In any case, we think it is reasonable to assume that genuine concerns about the solvency of peripheral banks are also playing a role here and these concerns are unlikely to go away any time soon…

Spanish banks 1, Spanish mortgages 0MacroScope / Reuters
…given that Spanish lenders were among the biggest taker of the ECB’s largesse  (officially known as  LTROs, a name only a central banker’s mother could love) the lack of trickle down  is less than bracing.  The suspicion is that Spain’s banks are holding back on lending because of their wonky balance sheets…

European Money Up, Loans Down; Or Why The LTRO Is Still A FailureZH
Goldman Sachs: Lending to private, non-financial corporates declined by EUR5.5bn. Loans to households grew by EUR6.1bn (after last month’s flat reading), but remain well below the average monthly gains of EUR17bn over the series’ history. While it is still too early to fully assess the effectiveness of the ECB’s recent non-standard measures - with three months of data now available since the inaugural 3-year LTRO – there is no evidence, at least so far, that the liquidity provided led to any rebound in the lending dynamics to the real economy.

ECB Deposits Rise To Most Since Early MarchZH
UBS: the German banking system has become a bigger and bigger depositor over the period, while the Spanish and Italians have become very heavy borrowers...non-domestic ownership of Spanish and Italian government bonds has been declining rapidly in recent months. The euro is being deconstructed from within; facilitated no doubt unwillingly by the ECB.

The ECB lending to periphery governments via "backdoor
SMP"Sober Look
back in March some financial engineering took place that would make even an experienced Wall Street structurer jealous. The goal was to achieve a "backdoor SMP" in spite of the ECB's policy to put the SMP on hold. Let's take Italy as an example. Here are the steps used to achieve this financing:

Bank of Spain Confirms Foreigners Dump Spanish Bonds; Spanish Banks Foolishly Load UpMish’s
There was "help" alright, help by ECB president Mario Draghi to allow German, French, and Italian banks to dump Spanish debt hand over fist to fools in Spain…Who should pay for the idiocy of loading up on Spanish debt once it implodes? The answer of course is the banks and the bondholders. But No!

Is LTRO QE in disguise?
The ECB has managed a massive expansion of its balance sheet with long-term refinancing operations. This has been called the equivalent of quantitative easing, as done by the Fed and the Bank of England. This column thus argues that the main obstacle for the ECB is not tight limits on the purchase of government bonds. Rather, it is the absence of a banking and fiscal union and the heterogeneity within the Eurozone that reduces the effectiveness of the ECB instruments.

Visualizing Why LTRO = QEZH
The ECB's more restrictive mandate, however, does not allow them to print money for any other purpose than lending and so direct QE was out of the question and so, as the chart below demonstrates, they ingeniously created the LTRO - delivering an infusion of liquidity (potential profits from carry and hope for capital raises).

Everything You Know About Monetary Policy Is Wrong... And Why This Is Very Bad News For EuropeZH
Aitken Advisors’ presentation: collateral is money, and everyone is out of collateral. Loosening collateral standards only increases eventual pain, and LTRO is counterproductive.

On the Odds of an Ease Bruce Krasting
I’m going to go against the consensus opinion. The Fed is on hold until December. We will not see another LTRO operation this year. If I'm right, what does it mean for those lines on that chart? Nothing good.

Europe's Stigmatized Banks On The Verge Of CrucifixionZH
Only this time there can be no quick collateral-type response as money-good assets are few and far between.