On the day surplus liquidity (potentially) died, the ECB also made the following announcement about its covered bond purchase programme:
Which should come as no surprise, since we knew the ECB was only prepared to buy up to €60bn worth of paper until June 30, and had accumulated about €60.2bn by June 29.
But, as Reuters points out, southern European periphery banks were mostly locked out of the covered bond market anyway. It’s potentially one of the reasons why the ECB decided to buy eurozone government bonds in May instead, since the institutions that really needed help were not getting it.
Of more interest therefore will be the winding up of this facility.
As yet, though, we have no indication of the size, duration or scope of the ECB’s activities here. What we do know is that as of June 28 the ECB’s bond purchasing programme — also known as the ‘Securities Markets Programme’ — had accumulated €55bn worth of purchases since its launch on May 11.
Which, of course, is almost the same amount purchased via the ECB’s covered bond programme over a whole year.
Demand for the ECB’s latest sterilisation operation, meanwhile, has become particularly weak of late — meaning the ECB’s direct bond purchases won’t have been offset completely. In the latest round, for example, demand fell short by some €24bn.
Amongst other things, this could suggest some banks have resorted to meeting their liquidity shortfalls by offloading their bonds completely.
It’s definitely a more logical route to take if you’re in need of liquidity but are worried about sovereign risk exposure — especially since the three-month financing operation would only commit the institutions to another three months of uncertainty.
But here’s where the maths comes in handy.
If you take this figure, along with all the other liquidity options that are available, you begin to see a very different liquidity picture than the one portrayed by low demand for the three-month operation.
As one of our astute readers noted here, demand for the ECB’s main financing operation has been clocking up impressively since the beginning of the year, hitting €162.9bn worth of funds as of Tuesday, with 151 bidders.
What’s more, there’s another facility coming up on Thursday according to Unicredit’s Luca Cazzulani, which could be even more telling still. As he noted on Wednesday:
There may be a number of banks that currently face difficult access to liquidity but expect an improvement over the coming three months. These banks may have opted to bid liquidity at tomorrow 6-days operation and roll it on a weekly basis until their funding perspectives improve. Hence, demand at tomorrow 6D tender may be higher than initially expected.
Suspense is not over yet! If demand tomorrow is around EUR 100bn, we still remain in a situation of abundant liquidity: the total rollover amount would be EUR 230bn (EUR 130 at today’s 3M LRO + EUR 100bn tomorrow).
This should contribute to keep MM rates low, although not as much as if demand was in total 230bn already today.
If demand tomorrow is subdued (less than EUR 70bn), we should be prepared to see OIS (and EONIA) rising towards the refi relatively fast.
Andy Chaytor of RBS sums up the situation well too:
As my colleague Giles Gale points out there is perhaps some risk that the 3m isn’t actually what they were looking for, in which case the outlook is less rosy, but he assumes the more benign scenario laid about above and until I get evidence to the contrary so do I. That is certainly the market’s initial reaction, with risk and the euro rallying, albeit modestly.
Either way, it doesn’t seem like we’ll know the full extent of Europe’s liquidity needs until Thursday.
Related links:
The cost of normalisation – FT Alphaville
Numbers for LTRO-watchers – FT Alphaville
The €442bn question – a guide – FT Alphaville
July 1 could be the day liquidity dies – FT Alphaville