There was a time in late 2011 and early 2012 when people kept track of cash deposited with the ECB with great interest as it showed just where the latent money in the Eurosystem is going, or rather wasn't (and receiving 0.25% from the ECB in exchange for the 1.00% funding cost to borrow LTRO repos from the ECB, an inverse carry trade if you will). Subsequently it was shown that there is at least one liquidity rotation before the money reenters the ECB, as Spanish and Italian banks were busy buying up sovereign paper (now at a P&L loss since the onset of LTRO 1, never mind 2, and as noted earlier [7], with haircuts on Spanish paper about to go up by another 5%, the toxic liquidity spiral is about to resume), and that the bulk of the cash actually came in from "Northern" Europe where maturing risk paper was not rolled and instead was dumped with Mario Draghi. One thing is certain: this money was not re-entering the broader economy, but who cares about the people any longer. Well, it may be time to start caring about the ECB daily deposit update, because as of Friday, €793.6 billion was deposited with the ECB - an increase of €2.2 billion overnight, €18 billion compared to a week ago, and the highest since the €816 billion deposited on March 13.
ECB deposit facility usage below. Please ignore the exponential average trendline - it is there only for indicative purposes.
[8]
So what does account for moves in and out of the ECB? It seems that while Spain and Italy may be busy monetizing their own sovereign bonds to appear healthier in the secondary market than they are in reality, other countries are not waiting. Most notably Germany (and Dutch insurers, Finnish pension funds and so on). UBS explains:
We believe it is interesting that the large gap between German issuance and maturities has not translated into an increase in German ECB borrowing. Table 3 shows bonds issued and matured since June 2011, the last pre-crisis month in the euro area. German banks have seen €89 billion more maturities than new issuance over the period; the Spanish have a €52 billion shortfall and the Italians €40 billion.
[9]
However, on a net basis (including deposits made with the ECB), the German banking system has become a bigger and bigger depositor over the period, while the Spanish and Italians have become very heavy borrowers.
[10]
We believe that Chart 20 provides some of the explanation. The German banks (and Dutch insurers, Finnish pension funds and so on) were historically enthusiastic in embracing the euro. That is, they were large buyers of securities in non-domestic euro area countries.
[11]
The punchline:
This is, in our view, rapidly being unwound. As covered bonds mature, the funds are being repatriated by their providers, not rolled into new ones. Similarly, non-domestic ownership of Spanish and Italian government bonds has been declining rapidly in recent months. The euro is being deconstructed from within; facilitated no doubt unwillingly by the ECB.
Oops