ECB expiration of a €442 billion program ending Thursday!!!

Discussion in 'Economics' started by S2007S, Jun 28, 2010.

  1. S2007S

    S2007S

    This is going to get really interesting.


    The European Central Bank is scrambling to reassure markets that Thursday's expiration of a €442 billion ($547.46 billion) bank-lending program won't destabilize the financial system, even as banks across the region remain wary of lending to one another.

    The ECB introduced the 12-month lending facility last summer to encourage private-sector lending and ensure adequate liquidity within the 16-member currency bloc. Since then, the program, which represents more than half the ECB's liquidity operations, has become a lifeline to banks in Greece, Spain and other countries hit by the region's debt crisis.

    The cost of borrowing euros in the interbank market rose to an eight-month high Monday, as banks prepared for the one-year loan's expiration. The euro slid on worries that repayment will expose Europe's financial system to new threats. Yields on German bunds, a safe haven, fell.

    Some investors worry that vulnerable euro-area banks, unable to borrow in the interbank market, could have difficulty replacing that funding, despite repeated assurances from the ECB that it will provide funds on similar terms, albeit for only three months, beginning Wednesday.

    "We are confident that this very large financial transaction can take place without disruptions," ECB governing council member Ewald Nowotny said Friday.

    Banks in the region have been preparing for the event, hoarding cash by borrowing through the ECB's other lending operations. A total of 114 banks participated in the ECB's latest main refinancing operation, up from 101 bidders at the previous week's auctions. The ECB provides roughly €870 billion in temporary funds to banks in the region.

    The cost of borrowing euros in the interbank market rose to an eight-month high Mondayas the expiration of an ECB bank lending program approached. The Euro sign sculpture sits outside the European Central Bank headquarters in Frankfurt, Germany.
    ."We expect a huge takeup in the upcoming three-month refinancing operation," said RBS economist Nick Matthews. He estimated demand for the funds could top €250 billion, a record.

    The ECB finds itself in a tough situation as it tries to wean European banks off its liquidity drip while also seeking to contain stress in the banking sector. It announced the end of the operation in December before the Greece crisis sparked fears about the level of government debt in the euro zone.

    That reality has forced the ECB to implement new lending facilities that will give banks access to cash when the 12-month loan expires. The ECB has said it will provide funds for three months at an interest rate of 1% on Wednesday. It also will carry out a special six-day-loan operation on Thursday.

    "That's a very tricky exercise for the ECB to navigate," said Julian Callow, economist at Barclays Capital. "Of course, the ECB is replacing the 12-month funds" with three-month loans, he said, "but the expiry of the 12-month tender will result in a shortening of the maturity profile," putting more pressure on banks to look for funds elsewhere.

    Still, the ECB's steps should keep interest rates on corporate and other private-sector debt from rising too much, analysts said. "We expect that liquidity will stay abundant after July 1," said Laurence Mutkin, head of European interest-rate strategy at Morgan Stanley.

    But easing stress on banks comes at a price for ECB officials. If they keep flooding the banking system with cheap loans, they could create inflationary pressures down the road.