An interesting data point in the wake of this week’s SMP sterlization fail.
The amount of cash on overnight deposit at the ECB has breached the ‘psychologically important’ €300bn for the first time since June 2010.
From Reuters:
So, Eurozone banks want to keep things very liquid and prefer to leave funds at 0.50 per cent overnight rather than lend to each other.
Or, as we learnt earlier this week, deposit cash in ECB’s in the weekly term deposit facility (which is used to sterilize the bond market intervention activities of the Securities Markets Programme).
Looking at the the deposit facility over time though, €300bn was nearly reached at the beginning of November, and this seems to be the continuation of a growing trend:
As we know, the ECB has injected a lot of liquidity into the system, but no one wants to lend to each other. So the cash ends up back at the ECB, increasingly on overnight deposit.
Now, those points where the deposit facility drops dramatically mark the end of the reserve maintenance periods (over which the banks have to meet reserve targets, the latest of which is for €207.7bn).
On the last day of the period, deposits can be made with the ECB in a different facility that offers a higher overnight rate. It’s a bit of a hang up from calmer times when the ECB didn’t have to fund banks to the extent that it does now, i.e. it’s a bit off topic to even be discussing this but we wanted to explain drops in the graph.
Onto covered bond purchases:
From the above, it can be seen that there haven’t been many purchases under the second round of the Covered Bond Purchase Programme. The fun thing about these purchases is that they aren’t sterilized. However, they haven’t been able to buy much anyway since their hasn’t been much issuance. (Though they could buy in the secondary market too, it remains to be seen how much of that will be done though).
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Meanwhile, the ECB’s weekly liquidity operation (Main Refinancing Operation, MRO) saw some €265.5bn of cash allotted, compared to €247.2bn last week, and €194.8bn four weeks ago. The number of banks bidding for seven-day funds was also higher at 192 compared to 178 last week.
It all speaks of significant strains in the Eurozone banking system.
To wit, we bring to your attention this story from the Thursday’s FT:
The bleak warning was delivered to Mario Monti, the new Italian prime minister, in a confidential report from the European Commission at a meeting of the bloc’s finance ministers. Italy, the report stated, could weather short-lived turbulence on bond markets.
But it added: “Persistently high interest rates increase the risk of a self-fulfilling ‘run’ from Italy’s sovereign debt. A liquidity crisis could then turn into a solvency crisis.”
The severity of the situation prompted an apparent shift by Germany over possible support to the International Monetary Fund to boost its lending power.
Crikey. Things must be bad if the German’s are considering supporting something.
So bad that on Wednesday we saw Italy relaunch its special liquidity programme, China lower its reserve rate and the US Federal Reserve slash the rate on short term dollar loans.
What do they know, that we don’t?
Next up, the ECB to offer loans of up to three years and announce a broader pool of acceptable collateral?
- By Neil Hume and Lisa Pollack
Related link:
Warning: Financial comet spotted – FT Alphaville
Financial comet crashes into planet hyperbole – FT Alphaville
Draghi: “We are aware of the scarcity of eligible collateral” – FT Alphaville