Having been at the forefront of the recent collapse in core European bank stock prices, Deutsche Bank has - as we first reported last weekend - been 'crying uncle' but not in a way most would expect: instead of begging for more central bank easing, DB told the ECB (and BOJ) to stop easing as negative rates and more excess liquidity, are crushing it. This is why central banks are trapped, because they are damned if they don't ease any more with the global economy on the edge of recession, and damned if they ease further, pushing bank default risk even higher.
Which brings us to this morning's note from DB's Jim Reid who puts it best: "Markets are crying out for a circuit breaker at the moment."
There is just one problem: nobody knows what this circuit breaks would and should be, or if it would even work.
From today's Early Morning Reid
Markets are crying out for a circuit breaker at the moment. There is lots of talk about whether the ECB could buy senior bank debt and also whether Europe might look to bring in their own version of TARP. The former brings a whole host of moral hazard, political, legal and logistical questions especially in a bank bail-in regime. Before the ECB embarked on each of their government bond purchases (from Greece in 2010 to QE in 2015) there were similar arguments so it's not an insurmountable challenge but it's not a policy that is likely to be conducted overnight. With regards to TARP, remember this was a government led initiative and achieving a similar one in Europe with all the different governments having to agree on it would be a challenge to say the least. It's not as if Angela Merkel doesn't have her work cut out dealing with the migration crisis/backlash.
The problem for the ECB is that there are increasing worries that another deeper cut into negative deposit rate territory will create more negative sentiment for the banks due to what it might do to their profitability. Is this just a passing concern or has the market now moved against negative deposit rates? If it is the latter then central banks had better decide on an alternative quickly. The ECB will certainly have a tough 4 weeks trying to design further stimulus / market support that hits the mark ahead of their hotly anticipated March 10th meeting.
In other words, much more important than the Fed's March meeting (when it will certainly not hike rates), the ECB's March meeting may be the one that makes or breaks Eurozone banks if Draghi finds no middle ground between throwing even more negatve rate kitchen sinks at the problem - which has crushed Europe's banks - and doing nothing - which in December crushed Europe's asset managers when the EUR soared the most since the Fed's announcement of QE1.
Which means that in addition to the BOJ and the Fed, the ECB is the latest central banks which is now trapped.