Agua caliente at the ECB | FT Alphaville

Agua caliente at the ECB

A certain FT story has caused a bit of a stir in European markets on Tuesday.

It regards the fact that Spanish banks are lobbying the European Central Bank “to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week” and the fact they have accused the central bank of “absurd” behaviour in not renewing the scheme. Because apparently having banks rely solely on ECB liquidity isn’t absurd in its own right.

Anyway, ECB Governing Council member Christian Noyer has been talking down the potential effects of the 12-month LTRO’s expiry as a result. Via Reuters:

“The ECB and Eurosystem will do what is necessary to make sure the liquidity is there,” Noyer told Europe 1 radio. “You shouldn’t exaggerate things or be excessively worried,” he said about potential problems in money markets.

But not all are convinced.

Among them is Simon Derrick, analyst at custodian BNY Mellon, who summed up on Tuesday the situation that’s now facing the euro:

Both our own flow data and the latest price action in a range of underlying asset markets indicate that the EUR is living on borrowed time.

Although, he notes, the market will probably need some sort of catalyst event if it is to begin to buckle.

Luckily for all, we might have just that coming up on Thursday. Not only is it the day the ECB’s LTRO expires, it’s also the day Spain goes to market in its latest bond auction.

As Derrick observes (our emphasis):

Although the currency markets may have taken a relatively sanguine view towards the EUR over the course of the past month, it is clear that sentiment towards the underlying asset markets continues to deteriorate at a rapid pace (particularly towards Greece). Given that the performance of the EUR over the past decade has, to a large degree, been intertwined with that of its underlying sovereign debt markets (given the role it was given as a credible alternative to the USD as a major reserve currency), this is an ominous sign.

More simply put, if it is a choice between believing in the action seen in the currency markets at present or that in the underlying markets, we would choose the latter

As with most crises, however, there usually needs to be a specific catalyst to spark the currency markets to life.
Given this we note the Presidential election taking place in Germany on Wednesday (a vote that is increasingly seen as a vote of confidence in the government), while Thursday sees both a Spanish Government bond auction and the expiry of the ECB’s EUR 442 Bn in on-year loans to 1,121 Eurozone banks (the ECB will be meeting in full banks’ demands for three month liquidity on Wednesday, and then on Thursday it will offer unlimited funds for six days). As all three events have the potential to significantly unsettle the currency markets, the latter part of this week could be worth watching closely.

Which, of course, is particularly nice timing by Spain.

The auction in question by the way is for five-year bonds, although the sum to be auctioned has yet to determined — which we presume is to manage expectations on account of Spain’s long, hot, refinancing summer ahead.

Related links:
The €442bn question – a guide – FT Alphaville
July 1 could be the day liquidity dies – FT Alphaville
LTROpprobrium – FT Alphaville