By Todd Buell
FRANKFURT (MNI) – As concerns about the health of the Eurozone’s
periphery intensify again, most EMU banks seem less in need of central
bank liquidity than once feared.
This conclusion can be drawn from the uptake at Thursday’s six-day
special “smoothing” operation, in which banks borrowed only E29.4
billion, after many analysts predicted an allotment of between E50 and
E75 billion.
This result comes one day after the ECB supplied E104 billion in a
three-month liquidity operation. The total from the two operations, plus
the one-week refinancing operation earlier this week, means that banks
rolled over 65% of the E225 billion in ECB funding that expired today.
While that is a higher percentage than they rolled over in July
when the ECB’s E442 billion LTRO expired, it still means that nearly E80
billion was drained from the money market this week — though of course
the cash could always return in subsequent operations.
In reaction to the removal of that liquidity, short-term money
market rates spiked following the publication of today’s results. The
three-month EONIA rate rose almost 12 basis points from Wednesday’s
close to hit 0.7065%, its highest level since August 11.
While in the aggregate it is good that banks can rely more on each
other in the interbank market than they could in the past, the fact that
50 banks still needed to come to the ECB for guaranteed funding at
higher rates than in the interbank market is still troubling.
Although today’s result confirms a broad trend towards
normalization in the banking sector, a relatively small, hard core of
“addicted” banks remains a persistent problem in the Eurozone.
ECB President Jean-Claude Trichet noted that today’s results mean
Eurozone banks’ need for additional liquidity is diminishing.
“As you know, we are in a mode for all those operations of a supply
of liquidity which is very, very abundant, and [today's result] signals
that the banks were not asking for the same level of liquidity as they
were asking for before,” Trichet told reporters in Brussels.
“The market has taken this as a positive [sign],” he observed. “I
would not comment myself; I would only say that it is true that the
demand for liquidity has diminished in this occasion.”
Earlier today, ECB Vice President Vitor Constancio said that
yesterday’s uptake in the three-month operation — lower than expected
by some, but not all — was not a matter for concern. Rather, it was
“proof of the gradual normalization of the money market, and it goes in
line with what happened in the previous months since June,” he said.
From this point of view, this week’s allotments mean that the ECB
could have some margin to go further with its exit strategy in early
2011, if conditions on the market remain broadly normal and there’s no
return of a full-blown sovereign debt crisis.
For example, the central bank could decide to return to competitive
bidding in its 3-month operations, as it did earlier this year before
the Greek crisis forced it to reverse course.
But markets are unsettled with regard to the fiscal and economic
prospects of peripheral Eurozone states. Anything could happen.
This morning, the Irish central bank announced that the total cost
of bailing out the embattled Anglo Irish Bank would be at least E29.3
billion and could be as high E34.3 — up from a previous government
estimate of about E25 billion. Thus far, the country has only injected
E4 billion in cash into the troubled lender, with the rest of the money
coming in the form of promissory notes to be paid down over an
unspecified timeline.
This reality check out of Dublin means that the country’s budget
deficit this year will hit a staggering 32% of GDP once the bank bailout
cost is included. Excluding that one-off impact, the deficit will still
be 11% of GDP, the highest in the Eurozone. Ireland’s central bank said
the new calculations on Anglo-Irish would require a “reprogramming of
the budgetary profile.”
Later in the day, the government announced it would essentially
take over control of the country’s second largest bank, Allied Irish,
with public capital support of E5.4 billion. That raises the Irish
government’s total bank bailout cost to E35 billion…and counting.
Policymakers at this point are expressing confidence that Ireland
can avoid the fate of Greece and will not need to seek outside help to
pay down its debts.
But we’ve been down this road before…
Markets have so far reacted positively not only to today’s Irish
news, but also to Moody’s downgrade of Spain’s sovereign debt rating.
That no doubt comes from a sense of relief — whether justified or not
— that perhaps now all the dirty laundry has been aired and the air
cleared.
Yields on both Irish and Portuguese 10-year bonds tightened
significantly against the benchmark German Bund in afternoon trading
Thursday. Irish sovereigns were 20 basis points tighter than Wednesday’s
close and Portuguese paper was 27 points tighter.
But Spain, nagged by a recent report of inconsistency in its GDP
data, lagged behind. Spreads on 10-year Spanish paper tightened only 10
basis points.
But that’s still movement in the right direction from Madrid’s
perspective, and Bank of Spain Governor Miguel Fernandez Ordonez said
today that the market had reacted “very well” to the Moody’s downgrade.
Markets seem to be betting, for the moment at least, that things
are not going to get worse. Still, they just might.
Unless the reports — or perhaps they are merely unfounded rumors
— of funny business in Spain’s GDP accounts are quickly dispatched,
there could be trouble. Afterall, unreliable data is a highly explosive
subject after what happened in Greece.
Only time will tell if the results from this week’s refinancing
operations really do mean a slow return to normalcy or were just a green
shoot poking through a garden of further sprouting weeds.
–Frankfurt bureau; +49-69-720142; tbuell@marketnews.com
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