*ECB FAILS TO FULLY STERILIZE BOND PURCHASES
We will look at what, if anything, this means a bit later. But there’s already plenty of theories flying around the interweb.
For example:
ECB fails to full sterilize bond purchases #euro — ie it is engaging in QE to finance deficit spending
For now, though, here are the facts — via Reuters:
RTRS-ECB DRAINS 194.199 BLN EUROS IN 7-DAY DEPOSITS
RTRS-ECB SAYS 85 BANKS BID TO DEPOSIT TOTAL OF 194.199 BLN EUROS IN 7-DAY DEPOSITS
RTRS-ECB SAYS WEIGHTED AVERAGE INTEREST RATE ON 7-DAY DEPOSITS 0.62 PCT
And if anyone tells you this is a first, they are wrong. It happened before in June 2010.
Update: 12.38pm (London time)
Some interesting thoughts from IFR’s Divyang Shah.
It has been a while since the ECB has failed to drain the full amount in their weekly term deposit facility. The intention was to absorb 203.5bn but instead the ECB only received bids totaling 194.2bn leaving a small shortfall but enough to raise doubts over the ability to continue to sterilize SMP. So what does it mean?
The only reason we can think of to explain the inability of the ECB to get the necessary deposits is that banks prefer to keep things very liquid and park funds o/n as opposed to over the week. This highlights the fragility of confidence and concerns that a step up in the crisis might require the precautionary funds parked at the ECB to be utilized.
Which brings us to another question we have asked before: What is the limit for ECB hard money?
It does open up a much wider debate that if the ECB continues to intervene via the SMP in the sovereign bond markets then they are getting ever closer to a speed limit of how much can be sterilized. We might be closer to either the ECB 1) moving from sterilized to unsterilized intervention which will be classed as QE or 2) the potential that banks might need lengthier term auctions to entice them to lend funds. We think the latter is likely but not going to solve the issue as banks will continue to prefer o/n money on deposit.
So the SMP is potentially constrained. Not what Italy and Spain need to hear right now.
Related link:
Italy pays record yields at bond auction – FT