Fresh off the wire on Wednesday:
RTRS – ITALY TREASURY SAYS TO LAUNCH AUCTIONS TO LEND OR BORROW SIGNIFICANT AMOUNTS OF CASH ON MONEY MARKET USING TRSY’S ACCOUNT AT BANK OF ITALY
RTRS – ITALY SAYS AUCTIONS TO NORMALLY OFFER OVERNIGHT MATURITIES WITH CREDIT LIMITS, WILL HOLD MORNING AND SOMETIMES AFTERNOON AUCTIONS
RTRS – ITALY TRSY SAYS NEW SYSTEM OF LIQUIDITY MANAGEMENT THROUGH AUCTIONS STARTS TODAY
An interesting announcement by the Italian Treasury indeed.
For two reasons.
First, it reveals that the Italian Treasury is prepared to intervene in the money markets directly — presumably to ease tensions, a job usually reserved for the central bank.
Second, the facility sounds awfully like the Supplemental Financing Program which was introduced by the US Treasury in cooperation with Fed in the fall of 2008. The move could therefore be designed to give the Italian central bank a little more fighting power and control of money market rates.
Here’s the full release in any case:
The wording itself is interesting. At first sight, it gives you the impression that this is about the Treasury lending cash to the money markets, suggesting emergency liquidity assisstance (ELA) efforts.
But, the use of the phrase “to lend or borrow” makes us think it might be just as much about lending bills into the market as it is about lending cash. After all, if this was just about emergency liquidity, there would not be any need for Treasury involvement.
The Treasury factor suggests this is much more about providing the market with bills and bonds as it is about cash, and that means it’s more akin to the UK Debt Management Office’s Standing Gilt Facility or the US SFP than anything else. Though we are guessing here.
All we know is that some Italian bonds became extremely sought over in collateral markets this quarter, this makes a lot of sense. After all it became so hard to cover short positions, it was almost too risky to take on short positions at all — freezing the market.
It’s an interesting move, and one which could possibly make a lot of difference in the money markets (if our interpretation is correct). One thing’s for sure, it certainly makes more sense than the fail penalty system which was introduced in September. That, arguably, only drove the failing issue under ground while frightening partcipants out of the market completely.
To date Italy has only offered a bond exchange facility.
We may be wrong, but it’s certainly one logical explanation (at first sight).
——
Update 12:29 GMT: A helpful reader ‘in the know’ (UK Trader) points out below that this is a longstanding project and therefore nothing to do with easing market tensions, and more about helping the Treasury manage their own liquidity, specifically by helping them to invest it rather than to leave it at the Bank of Italy.
Thus the key takeaway is: This is not Emergency Liquidity Assistance. It’s also not a programme designed to impact the monetary base. It does initiate further cooperation between the Bank of Italy and the Treasury. One unintended consequence , however, is that it may end up helping market liquidity as well. Further down the line they could use collateralised deposits, but there is no collateral pledge at the moment. In the event that collateral is used it would be on a one-sided basis (collateral taken in).
Mystery solved. Phew.
Related links:
Italian settlement fail penalty, bond sell-off — causation or correlation? - FT Alphaville
On the perils of plunging repo rates - FT Alphaville