STOCK MARKET WATCH -- Wednesday, 7 March 2012

[Demeter]

5. Europe’s Recession Has Barely Begun

http://www.nakedcapitalism.com/2012/03/europes-recession-has-barely-begun.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

The reserves from the ECB’s LTRO stage II operation are making their way back into the excess reserve facility at the ECB. The overnight holdings were at an all time record of €820.81bn. As I explained previously, this in itself isn’t a problem. In fact, unless the reserves are moving to some other non-commercial bank accounts at the ECB there is little other place they can go. However, what is the problem:

…is that the increasing use of the ECB’s marginal lending facility shows that not all of these parked reserves are actually “excess to market requirements”.

The statistics from last night show that for the last 3 days there is still €783 million being rolled over using the ECB’s margin lending facility. With €0.8trn technically available for interbank lending it is certainly a concern that there is at least one bank still having to lean on the ECB for overnight liquidity. Once again this suggests the ECB is still holding up zombie banks that other banks are unwilling to trade with.

On top of the LTRO outcomes I have been running two major risk themes on Europe under the current “plan” over the last few months. Firstly the major one:

Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking.

Secondly, on top of the obvious problems in Greece and Portugal, the “black cygnet” that is Spain:

.. Spain which I consider to be the major unrecognised problem. The country has seen its yields tumble since December on the back of the ECB’s 3-year LTRO but there hasn’t been anything in the economic metrics of the country to support such action. Spain has 23% unemployment and still rising, the banking system is under-capitalised and still has unknown exposure to the country’s housing market collapse. On top of that the rising unemployment rates is pushing up bad loans in the banking system to 7.4%, a 17-year high, and is still rising.

You can read more about my expected outcomes for Europe here, but in short, my base case is that the fiscal compact will never actually be implemented because member nations will look to Greece and Portugal and quickly realise it is economic suicide to attempt to deleverage the government sector of a non-export competitive euro-bound nation at a time when the private sector has no capacity to provide the required counter measures. That is, increased production, dis-saving and/or additional debt. As I noted yesterday, it appears Spain has already come to that conclusion and is now openly rebuking Europe’s call for it to meet unachievable deficit targets over the next financial period...

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