Citi’s research team highlights the important point that Germany’s Bundesbank has signalled that it is open to an end to ECB sterilisation operations.
The move follows consecutive failures by the ECB to sterilise its bond purchases in the last month.
As the Citi analysts note, the failures potentially indicate funding pressures in the Eurozone, following the removal of a lot of excess liquidity from the system:
with the ECB failing to attract sufficient bids for its liquidity absorbing 7-day fixed-term deposit, sterilisation is not functioning as well as intended, with investors preferring to keep hold of some funds as the excess liquidity position dwindles. We suspect that the ECB could soon announce that it will suspend sterilisation at least until July 2015, during which period the ECB has committed to full allocation fixed rates for the 7-day MRO. Alternatively, the Governing Council could decide to lower/abolish minimum reserve requirements (last change from 2% to 1% in Dec-11) in order to tackle the recent increase in overnight interest rates that runs counter to its very accommodative monetary policy stance.
Icap’s Chris Clark alerts us on Friday to the fact that European liquidity markets are already preparing themselves for a potential liquidity squeeze come the end of the year.
As he notes:
Month-ends have become increasingly significant events for the Eurozone repo markets over the second half of this year as levels of excess liquidity have diminished and market rates have slowly edged higher. This Thanksgivings Day/November month-end liquidity hump has proved a tricky one for the market to manoeuvre, but already attention is focusing on the impending year-end as evidence stacks up to suggest funding might be problematic for some.
Presenting Italy, a central plank in the argument for a new vLTRO or at least an extension of what we already have:
Have an expansive ECB toolkit courtesy of Deutsche (click to enlarge):
On that note, here’s Reuters on Wednesday:
The European Central Bank is considering a new long-term liquidity operation available only to banks that agree to use the funding to lend to businesses, a German newspaper reported on Wednesday, citing sources.
A while ago we speculated that because of the ongoing bifurcation of the eurozone market, Eonia rates could rise, and liquidity once again concentrate in core economies, as banks pay back their LTRO funds.
Even if it appeared that the system could handle the repayments, banks in core economies would still be inclined to take advantage of extremely cheap negative rates available in collateral markets, so as to earn a spread on the deposit facility in a way that arguably encumbered the remaining liquidity. That would make it less available to periphery institutions.
Meanwhile, without the additional layer of ECB liquidity in the system — which acts as a type of system-wide insurance mechanism — periphery banks would consequently be forced to make ever more competitive bids for Eonia funds, lifting rates across the board. Read more
This is something we should have already picked up on. Russia’s central bank has its own LTRO going on and it had its first auction on Monday. Twas a little disappointing.
First, a catchup from Nomura: Read more
First some charts from Barclays:
Mario Draghi talked, everyone was a little confused, a little wary… so the euro fell. He OMT’ed the FX market. Clever.
But what if talking isn’t enough? As Capital Economics argue, the power of talk is diminished when others are taking action: Read more
LTRO-porn continues… this time it’s semi-core.
As we noted before, the higher than expected repayments by banks of the Long Term Refinancing Operations to the ECB might also push up the amount of paper in circulation as collateral which was tied up in carry trades is returned to banks. That would put pressure on markets which benefitted from the LTRO cash.
What we didn’t think of was Belgium. Poor thing. Read more
You gotta roll with fashion:
That’s a very small €3.7bn take up by banks participating in the European Central Bank’s three-month Long Term Refinancing Operation on Wednesday. We’d expected more. Read more
The first LTRO repayment opportunity is fast approaching. David has already considered how it may or may not impact European lending rates, including the chances of Eonia rising significantly if the repayment is larger than expected.
Yet as we also noted, this is hardly the key concern. Read more
Take one big pool of eurozone liquidity, insert straws and start sucking.
We’ve already opined on the chances that early-LTRO repayment will lead to a drain on excess-liquidty in the euro-area. But we argued that since it is unlikely to take more than about €200bn out of circulation, with consensus expecting about €130bn to be sent back, the effects should be muted.
But what if another straw is soon to be inserted? Read more
LTRO repayment chat is speeding up the closer we get to the fateful day at the end of January when Euro-banks might actually start sending back once cheap cash to the central bank. How much will be repaid, by whom and when are the questions that need to be answered.
Thing is, it seems that by at least one measure, the market is mispricing the amount of cash that’ll flow back to the European Central Bank. And maybe ignoring the ECB’s motives in this whole debate. Read more
The ECB announced some updates to its General Documentation on Wednesday. The item on ABS modifications caught our eye.
The move in question was first announced last April, and it represented a toughening up of the rules around ABS collateral for borrowing from the ECB. The update therefore isn’t so much a surprise as a reminder of one of the ongoing, but less spoken about, hangovers of the crisis.
Let’s review the situation… Read more
Things have gotten so good recently for European banks that the idea of them repaying their LTRO cash early is getting more attention as the first date at which they can do so — January 2013 — creeps up. And there’s certainly more bank debt being issued, even by the peripherals:
Asset encumbrance ratios are becoming a fashionable metric when it comes to assessing the health of banks.
On that note, Société Générale’s cross-asset research group provides a nice little break-down on Monday. While SocGen don’t believe that asset encumbrance is a major problem for any bank yet, they do recognise that the issue is becoming important on account of banks’ recourse to secured funding, and one likely to be picked up on by ratings agencies soon. Read more
Consider this chart from Bank of America Merrill Lynch:
What it shows is pressure building on the front-end of Euribor contracts. Short positions might be stacking up, apparently.
Why? It might be because there is speculation flitting about that European banks will begin to pay back some of their LTRO cash in the near future. Something not everyone thinks is likely to happen. Read more
It doesn’t come as much of a surprise that the Spanish financial sector is having to increasingly rely on ECB funding.
However, data released by the Bank of Spain on Tuesday reveals the sheer speed at which this happened: Read more
Italy’s March balance of payments data showed a big net outflow for investment
This was something picked up by Deutsche Bank’s Alan Ruskin (and us, here) as suggesting an accelerating outflow of foreign capital from Italy, now that the LTRO glow had worn off. It appeared to be happening, worryingly, at a rate that was not being offset by Italian repatriation of capital. Read more
The European Central Bank will meet on Thursday, and the broad consensus is for rates to remain on hold. After yesterday’s dismal Purchasing Manager Indices, the press conference will be watched even more closely.
A quick recap of those PMI numbers, courtesy of Jim Reid and Colin Tan at Deutsche Bank, and then onto the implications for the ECB’s rate setting. Read more
Hold the phone… something very interesting in the Spanish banks <=ECB=> Spanish sovereign nexus came up at the end of last week.
Suggesting that it’s in better shape than the Italian version of the nexus. Read more
Beyond Thursday’s back-up in Spanish bond yields — questions about Spain’s banks.
How could there not be when they’ve been buying so much sovereign debt since the LTRO. Ever since December’s record jump of €22.5bn in purchases in fact, as banks began washing LTRO cash through the domestic bond market. (Chart via Nomura) Read more
Thanks to Mario Draghi’s double installment of 3-year LTROs this year and last, it’s been a while since we’ve had to worry about dysfunctions in the European repo market. Indeed, it wasn’t that long ago that the market’s problems appeared fully contained. But, could we have spoken to soon?
News now comes to us of another case of “causation or correlation?” striking European bond markets. This time relating to Spanish collateral. Read more
The ECB’s move to unclog the transmission mechanism, that carries its monetary policy decisions to markets and the wider economy, has been unconventional. The €1,019bn in cheap three-year loans to banks, under its long-term refinancing operations (LTRO), being the most daring.
Naturally, the question on the minds of many is whether the operation has just delayed the inevitable. While the policy goal for the eurozone’s central bank was clear — unclog the transmission mechanism — the fact that this would just buy time for the fiscal and balance sheet readjustments of sovereigns and banks was evident from the beginning. Read more
Readers might recall that FT Alphaville spent a good portion of 2011 speculating about whether the ECB had lost control of the policy transmission mechanism.
Our point specifically related to the ECB’s diminishing influence on the secured collateral financing market, and how Target2 imbalances were potentially compromising its influence further. Read more
In February, European banks lapped up €530bn of funding from the ECB, for a three-year term. In November, they’d taken €489bn. ECB president Mario Draghi called the operations an “unquestionable success”.* That’s nice.
But how can we objectively measure the success or failure of this unprecedented support by the central bank of so many diverse nations? Read more
Courtesy of UBS. Click to enlarge…
Deutsche Bank, whose chief executive decried the stigma of tapping ECB three-year liquidity last month, has borrowed at least €5bn and as much as €10bn from the latest LTRO, the FT reports. Investors briefed by the bank’s finance director and investor relations executives say it was persuaded by the economics of the financing to abandon its concerns. Josef Ackermann had said that Deutsche was “loathe to give up” its reputation for never having taken government money. ECB president Mario Draghi revealed on Wednesday that 460 of 800 banks that funded from the February LTRO were German.