Something Smells in Euroland Again

This morning, my first post of the day talked about the large number of short term notes/debt that were by and large, well received despite last week's S&P downgrade. Also the EFSF was downgraded and also placed $1.5 billion euros in short term debt (barely a drop in the bucket compared to the $1 trillion plus leverage of the EFSF that was conceived and went no where). 


This morning I specifically said,  (note highlighted portions)

Overnight as European markets opened, there was some good news; the EFSF after being downgraded successfully auctioned off $1.5 bn euros in 6 month bills at a yield of .2664% with a healthy bid to cover ratio. 

The bottom line, even after the downgrade, EU countries are not having much trouble selling short term debt. Who knows if there was ECB "round-about" intervention, they did make some interesting comments about the ratings agencies.

Overnight and this is kind of the strange part, the ECB's deposit facility hit another record high at $502 bn Euros. I wouldn't expect an increase if money, especially any LTRO money was being used to buy the short dated debt sold today. 


And as far as those Draghi comments:

Draghi Questions Role of Ratings Companies After Downgrades

Draghi said,

“I will never comment on ratings as such, but certainly one needs to ask how important are these ratings for the marketplace overall, for investors?” Draghi said late yesterday at the European Parliament in Strasbourg. “It seems to a great extent markets have anticipated these ratings changes and priced them in. We should learn to do without ratings, or at least we should learn to assess creditworthiness” 


And you may be wondering where I'm going with this...


As in the U.S., the ECB is forbidden to participate in direct/primary soveriegn debt auctions. They can buy all they want in the secondary market for many of the countries and support yields that way, but primary markets are off limits and that is what these auctions were today, primary offerings.


I mentioned Draghi's seeming disdain for the ratings agencies and also said, "Who knows if there was ECB "round-about" intervention,".


I mentioned this specifically because there were several primary auctions that came in with yields below that of the secondary market, this would suggest that the ECB "may" have intervened in the primary auctions via some mechanism like passing cash on to several banks to do the buying for them in a clandestine-type of POMO operation which if they bid aggressively enough, would cause the auction to come in below the secondary market yields.


Given Draghi's view on the rating agencies, given the past oddities in several auctions in which the ECB has been suspect, it's not so far fetched that they might want to do some damage control after the ratings downgrades.


Here is where it gets interesting...

This is the spread on the EFSF, note today it dropped from about $142.50 to the $138 area based on the solid auction. However, one the auction passed, the EFSF hit $146.94 later in the day, or the highest level since December 21st (the date of the LTRO). If sentiment was positive enough to have a successful auction and knock the spread down, why didn't it stay down? It appears there may in fact have been some intervention in not only the EFSF auction, but most likely all of them to, once again, do damage control and suggest to investors in bonds that the ratings downgrades had no effect on a sovereigns ability to rase short term borrowing at favorable yields.

Just something to chew over.