Tomorrow the ECB will offer 3 year liquidity to EU banks that can put up sub-grade A paper as collateral, the thinking is the banks will see a carry trade at 1% borrowing costs and 5% yield buying PIIGS debt.
However, some of the top bankers in the EU have already made their plans clear, so while the market throws another sugar rush party which we had been expecting, the writing is already on the Wall. The following are quotes from EU banks re: the ECB's LTRO tender:
"When investors are constantly asking what you have on your books and the board is asking you to reduce your exposure, it doesn't really matter about the economics of the trade," said the treasurer of one of Europe's biggest banks. "Am I going to buy Italian bonds? No."
Unicredit, one of the biggest holders of Italian debt said: Using ECB money to buy government debt "wouldn't be logical".
"I can't think for a moment why anyone would want to [buy eurozone government debt]," said the head of capital markets at one European bank that is also reducing its exposure to eurozone sovereign bonds. "Everyone is trying to protect capital. It's counter-intuitive. It would be digging a deeper hole for yourself."
"Banks need this liquidity to get them through the wall of refinancing they are facing next year. That's where the money is going to go."
While steps are being taken, the crisis is far from over," added Mark Schofield, an analyst at Citigroup. "There is ample scope for rewidening as the market gets ahead of itself and as each bubble of optimism is pricked by reality. At the risk of sounding like a broken record, things will get worse before they get better."
It seems Sarkozy's call: "Each state can turn to its banks, which will have liquidity at their disposal," seems as if it is DOA, like all other EU bailout plans.
5 years ago
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