Stress Testing Market Report - Testing for the End of the LTRO Effect - June 2012

Jun 29, 2012

The European Central Bank’s Long-Term Refinancing Operation (LTRO) has altered the relationship between German sovereign yields and German credit default swap (CDS) spreads. In this report, we analyze the “LTRO Effect,” which creates additional demand for German bunds because of their safety as collateral. We propose a hypothetical stress test through the lens of RiskManager that explores the effects of removing the LTRO liquidity program. Our results suggest that the disappearance of additional liquidity would cause a general decline in bond markets within the Eurozone and would also have a significant indirect effect on regional and global equity markets.