Wednesday is 3-month LTRO day.
This, of course, is otherwise known as the ECB’s Long-Term Refinancing Operation, in which banks get to bid for an unlimited funds for a three-month duration.
According to Gary Jenkins at Evolution Securities, something like €201bn worth of current funding (€104bn from the last LTRO and €96.9bn from December 2009’s 12-month operation) is due to mature on Thursday. How much of that is rolled into both Wednesday’s LTRO and Thursday’s main (13-day) refinancing operation is likely then to give some indication of the funding difficulty facing banks, he says.
And as Unicredit’s Luca Cazzulani adds, the rate at which the 3-month operation is extended will be based on the average rate achieved at the ECB’s main refinancing operations (MROs) over the life of the operation.
Unicredit expects that to be 1 per cent.
Either way, according to Cazzulani, the results should be interesting because demand at previous refinancings has so far been signalling high demand, especially from peripheral countries:
The most recent refinancing operations have signaled market tensions: demand has exceeded the amount expiring at the last three 1M LTROs (net increase in liquidity has been EUR 30bn) and at the last two 3M LTROs (+EUR 38bn). Moreover, at the last MRO, bids were EUR 5bn higher than redemptions.
The most recent data on funding at the ECB show that during the last
12 months demand for liquidity from core countries has fallen
while demand from peripheral countries has increased.
Unicredit estimates something like 11 per cent of the expiring 12-month LTRO funds was that taken up by Spanish banks, 3.5 per cent by Italian banks and about 20 per cent by a collection of Greek, Irish and Portuguese banks.
Of the 3-month funds, they estimate something like 50 per cent was taken up by Greece, Ireland and Portugal with another 20 per cent by Spain and 5 per cent by Italy.
A situation which will likely see core countries cut down on the amount of funding they rollover and peripheral countries load up more.
As Cazzulani notes:
With respect to the 3M LTRO, we pencil in a modest reduction in demand for core countries (80% roll-over) and a modest increase in demand from periphery. All in all, EUR 108bn should be rolled over. We also expect banks to shift demand resulting from the expiry of the 12M to the 3M, so total demand at the 3M LTRO should be in the EUR 155bn range, with further upside risks due to speculative demand.
We expect a total demand of ca EUR 185bn (summing up the 13D
and the 3M) EUR 15bn less than the expiring amount. As a result,
the ECB outstanding operations should be EUR 510bn. Excess liquidity
(currently close to EUR 100bn) should fall to around EUR 85bn.
And here’s a handy table that sets out their projections:
Overall, Cazzulani, says, a scenario in which demand for total refinancings came in above €200bn would be seen as concerning, since it would indicate market tensions were still high.
Conversely, if total demand came in below €150bn it would signal a move towards normalization, upping the chances of the ECB resuming its exit strategy.
The results of the LTRO allotment should be published on the ECB website at around 10.15 am London time.
Update: 10:25 GMT – The results are in and it seems the ECB alloted €149.5bn in its 3-month long-term refinancing operation.
That’s slightly less than the sum expected by Unicredit which was €154bn (€108bn from the 3-month, plus €46bn from the 12-month). Also worth pointing out that there was a total of 270 bidders.
Of course, we won’t know the full picture until the results of the main refinancing operation on Thursday.
Another LTRO roll-over – FT Alphaville
The slooooww death of Europe’s excess liquidity – FT Alphaville
Timing liquidity withdrawal as ECB addiction persists – MNI
Lenders seek help from new set of institutions – FT