European Sovereign Supply and LTRO

By Marc Chandler

This is a fairly busy week for European sovereign supply. Roughly 22 bln euros will be raised. This includes the 7.5 bln euros Italy raised yesterday by selling bonds and the 2.5 bln euros raised by Belgium in bills. Germany is seeking to raise 5 bln euros by selling 10 year bonds tomorrow and Portugal will sell bills. France and Spain plan on selling bonds on Thursday, Feb 2.

Often in the market talk, the emphasis is on supply, but investors ignore the maturing issues and coupon payments at their own peril. For example, tomorrow Italy has appears to be the largest maturity of the year. It will return about 26 bln euros to investors. In addition, coupon payments from Italy and Spain will give investors another 16 bln euros.

The idea is that some of the funds freed up in the maturing issue and made available by the coupon payments will be used to buy the new issues. As we noted earlier this month, the maturing issues and coupon payments just about covered the new issuance.

Next month is a different story. Preliminary figures suggest that issuance next month may be in the same area as this month (around 80 bln euros), but redemptions and coupon payments will be considerably less, covering about half of the project new issuance.

At the end of next month, the ECB will offer unlimited 3-year money in the long-term repo operation (LTRO). There has been market scuttlebutt that demand was going to be some multiple seen at first operation (489 bln euros) as the new more liberal collateral rules will be in effect and the stigma appears virtually non-existent.

In addition, the ECB has not indicated there there will be another LTRO. Even though there has been some speculation of another, perhaps even longer-dated operation, banks have to regard it as the last one.

The headline story in the Financial Times today is that "Banks set to double crisis loans from the ECB". The report says that "several" large banks from the euro zone told the FT that they "could double or triple" their takes at the LTRO.

The collateral rule change involves instruments that some reports are heavily weighted to French banks. While other countries’ banks may not have as much of the new collateral, they may be more needy. It appears that Italian banks were the largest participants in the first LTRO.

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.