>GREED & FEAR: Bullet dodged (CLSA)

Lugano


The Greek bullet has been dodged for now though the scheduled April elections in Greece remain an obvious stumbling block. Accordingly, GREED & fear’s base case remains with the “risk on” trade which means that any pullback in equities should be bought. A potential moderate disappointment for the markets may be that the LTRO-2 is not quite as large as previously expected because of the apparent reluctance of the big German and French banks to be seen taking up the carrot of generous ECB funding. For this reason the amount raised may be less than the €500bn-1tn previously guesstimated.


Still this will not be enough to end the “risk on” rally since those banks that really need the funding, or the profits from the carry trade like the Italian and Spanish banks, seem likely to participate again. Meanwhile, it is a telling sign of improving market conditions that Italian bank Intesa Sanpaolo was able this week to issue an €1bn unsecured bond with a five-year maturity, following its successful issuance of €1.5bn in unsecured 18-month bond at the end of January. Such longer term funding would have been impossible prior to the LTRO.


It also continues to be clear that Flexible Mario would like all the major European banks to take advantage of the LTRO. Indeed the ECB stance towards the banks is increasingly likely to be either take funding from the LTRO or raise equity, rather than the other option of pursuing deleveraging and balance sheet contraction. While, as previously noted here, it is also likely that the European Banking Authority (EBA) will come under growing pressure to relax its capital requirements even if nothing specific appears to have been announced yet.


To read the full report: GREED & FEAR
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