The LTRO

Well today's fulcrum event that sent the Euro bouncing off the broken $1.30 level as we expected last week due to FXE/Euro accumulation on 3c, the ECB's LTRO has had a massive take up with consensus coming in at a wild range of $250 bn all the way to an outlier of $500 bn, the actual take up of the 1% 3 year loans to EU banks came in a a whopping $489 bn which is above the general consensus which was closer to $300 bn euros. According to the ECB, 523 banks applied for the LTRO with collateral (as discussed here yesterday) as low as single A rated paper which means that the banks are saving Bunds and triple A rated paper for private liquidity raising operations, which also means the ECB with a balance sheet larger then the F_E_D's and at Lehman failure era leverage of 30x, the ECB is starting to worry investors.

The original reaction was a risk on rally, pretty inclusive across multiple asset classes.

After the original sugar rush rally, the market thought twice as we suspected as the money (I pointed this out in a post yesterday about what bankers said over the weekend) is likely not going to be used as the ECB hoped in a carry trade, buying sovereign debt, but rather going to be used to stabilize banks balance sheets. For the last 4 months EU banks have been selling everything to raise cash, why they would leverage up with toxic assets as Sarkozy had hoped, is quite amusing and one again shows how inept EU leaders are, but the ECB did manage to stay within its mandate on this operation, “Hail Mary”.

Italian BTPs are leaking wider and this is what the market was going to be watching, Sarkozy and the ECB hoped rates would fall on BTPS and other PIIGS debt, the opposite is happening. If anything, the huge take up reflects the liquidity freeze in both the traditional and shadow banking systems. As of this moment, nearly all 5 year EU CDS are leaking wider.

Remember, European banks have been ordered to raise capital and they have been de-leveraging, selling everything not nailed down, but to put the LTRO in perspective, they have $2.5 trillion in short term de-leveraging/Capital raising needs, which means today's LTRO accounts for about 20%, helpful, but not a game changer and that is assuming no banks engage in the carry trade.

In a minute we'll take a look at overnight trade.