Tuesday, January 17, 2012

Credit Suisse: LTRO Could be €10 TRILLION!

Credit Suisse states that reports indicate that in order to save the Euro, the new LTRO total could be an almost unimaginable  €10 TRILLION!!  We're talking around $13 Trillion!

February’s second 3-year LTRO looks set to be extremely large. Really extravagant claims (we have heard reports of €10 tn) are probably wide of the mark because this will not be a complete collateral free-for-all (unless NCBs choose to make it so, which for some of them is admittedly an open question; again, see rational player section below). But the idea of path-finder lightning springs to mind (High-speed cameras reveal that lightning evolves “bang BANG”, essentially); the last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best. This is, on the face of it, very cheap protection indeed against any possibility of a liquidity crisis for three years.

The Nashing of teeth

We continue to analyze the euro area sovereigns in game theoretic terms, with the game looking from outside like a CDO where value allocation is a function of expected losses and of correlation (distribution of those losses in a tranche structure).

In simplistic terms, we have stated that Portugal cannot rescue Greece (i.e., Greece's creditors), Spain cannot rescue Portugal, Italy cannot rescue Spain, France cannot rescue Italy, but Germany can rescue France.

In equally simplistic terms, we have stated many times that “crises are baked into the cake”.

With the CDO and game theory analysis, we have formally modelled both statements. In the game theory, we concluded that the most likely outcome is a series of ever-deeper crises and relief rallies culminating in a definitive moment. Before that definitive moment, our analysis suggests that both core and periphery parties playing hard-ball leads to an escalation of the crisis, but not calamity. Only at the decisive moment does a “collision” in our game of chicken model lead to catastrophe. We remain convinced that the decisive crisis has not been seen yet.

It appears that according to Credit Suisse, the risk of a derivatives crisis goes exponential in February.