You have to wonder.
It was expected that the ECB’s newly-minted three-year facility would put about €400 billion into the market this morning. Instead, it was somewhere around €600 billion, expanding the ECB’s balance sheet by a literal 20% overnight.
Essentially every bank of consequence in the ECB clamored to the ECB’s window to borrow the cheap money, with Draghi egging everyone on. This, you would think, would be cause for an extension of yesterday’s rally, since expansion of borrowing is a good thing, right?
Not so fast.
The market appears to have discerned that the European area banks have literally pulled the pin on a financial doomsday trade.
Yesterday European spreads screamed inward as “someone” was buying the hell out of European debt. Today we learned who it was — everyone.
Of course nobody “officially” can be told what to use the money for, but it doesn’t really matter. What we have happening here is that there’s little question that adding more than €500 billion in additional leverage to the European system is a “good thing” — that’s definitely bad.
Many people in the financial community expected that it would be several days or week before the market figured it out. Instead people started to noodle on this literally within minutes and it appears they also immediately came to their senses as to the wisdom (or lack thereof) of what the ECB has just done.
There’s one way to think of this that parallels our experience here in the US — think of this as the Lehman Trade, or the MF Global Trade, or if you prefer the Fannie and Freddie trade. The latter is probably more-appropriate, given that there are a number of banks over in the Euro Zone, including some really big ones, with leverage ratios approaching (or even exceeding!) 60:1. If this trade “works” and nobody loses more than 2% or so you make more money than you ever have before and everyone gets really big bonuses!
If it fails, well, there’s no Euro, there’s no bank, the governments involved probably collapse and there’s likely to be a war, so who gives a damn — go for it!
Here it comes!
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