Despite a less-worse Italian auction this morning, the Euro took a rather ominous swan dive this morning on the wholly unsurprising announcement that the ECB’s balance sheet has swelled to an all-time high of €2.73 trn. With the market otherwise fairly dull (aside from the odd story about JPMoMo sticking it to some infants and widows with a BBG headline comparing the House of Dimon to the Wehrmacht) I figure I’d take the time to succinctly re-cap my views on Europe, which I briefly touched on in my post last week.
I’m not negative on LTRO per se. I just think that the necessity of LTRO speaks volumes about the dire funding situation of Euro banks and to the inability of the EU as a federal body to summon the political will to act comprehensively and decisively. As we lose count of the number of EU interventions lets not forget that this is a slow-rolling, snowballing crisis that has been mounting for more than a year, during the course of which the EU has lost its credibility as a crisis manager. In LTRO we have yet another stop-gap, backdoor solution that barely responds to the immediate problems while leaving little possibility of further rapid expansion should the situation fail to improve on its own. A significant improvement in the policy environment notwithstanding, I don’t feel that this is a particularly likely outcome.
LTRO may look impressive at first glance. However, with €291.6bn maturing from the ECB’s 7 day main repo operation (MRO) and €169bn of MRO financing rolled on 12/21 against a further €140.6bn of older LTRO maturing (with only €29.7bn rolled), the actual new credit extended is significantly less. Net this refinancing against a slight increase in fixed-term deposits (€3.5bn) and €45.7 bn moved from October’s 12 mo. LTRO, the new 3-year LTRO adds only €206.5bn in new repo financing extended to financials. It’s worth noting that this covers only about 60% of the approximately €350bn of sub/unsecured/and otherwise currently un-rollable debt maturing in the coming year.