ECB Completes Much Smaller Than Expected LTRO, EUR Jumps, OIS Spikes On Material Eurozone Liquidity Contraction
Today the ECB completed a €104 billion 84 day liquidity providing LTRO, which saw the participation of 182 banks, receiving an allotted 1% fixed rate as part of the refinancing. Importantly, this amount was far less than was expected to be refied, as nearly €225 billion of 3, 6 and 12 month ECB loans were set to expire today and tomorrow, implying that the eurozone saw the extraction of about €120 billion in liquidity out of the system. As a result OIS has spiked on liquidity concerns, as well as expectations of future interbank borrowing to cover the lost liquidity. As per Market News: "The three month euro LIBOR/OIS spread narrowed
sharply Wednesday, as a result in the spike of the OIS rate following
the much weaker than expected demand at the European Central Bank's
3-month Long Term Refinancing Operation. Banks borrowed much less than widely expected, borrowing E104
billion in the 3-month LTRO, and driving predicted future lending rates
sharply higher. There is E225 billion in ECB loans expiring this week,
and the low take up at today's 3-month implies, on the face of it, there
is going to be reduced liquidity in the euro area, although banks could
use alternative central bank financing to get through the year end or
wait until ECB conducts its 6-day fine-tuning operation on Thursday." The immediate result of this news pushed the EURUSD 50 pips higher, as it implied, at least on the surface, that European banks are in less need of ECB handholding than expected. Of course, it is also possible that European banks have simply found less obvious ways to use ECB backstops to prop their daily operations.
Elsewhere, and in confirmation of the last, the one single bank that we have been writing about for a month now, once again was the sole bidder in the ECB's "dollar swap" operation, once again bidding 1.19% for $60 million worth of funds, which apparently it still can not get access to in the unsecured interbank market.