FRANKFURT (MNI) – The limited demand in the ECB’s final six month
tender earlier today shows that there is enough liquidity in the system
and that banks expect to have continued access to cheap funds in the
months ahead, analysts say.

The smaller than expected uptake may also signal ongoing
improvement in the banking sector, Barclay’s Julian Callow said.

The ECB announced earlier today that it had allotted some E17.876
billion to 62 banks in its final 6-month refi operation. This compared
with a consensus forecast of around E70 billion ahead of the operation,
though the forecast band was very large.

Analysts largely attributed the lower-than-expected outcome to
falling market interest rate expectations coupled with the ECB’s
commitment to maintain fixed-rate, full allotment procedures for weekly
MROs.

“Low demand shows that there is already a lot of liquidity in the
system,” Commerzbank’s Michael Schubert said, adding that it should also
be a reflection of declining interest rate expectations. “The fear of
loosing access to cheap funds by not participating in longer-term
operations has clearly declined,” Schubert explained.

This was also reflected in the very small demand for today’s
3-month operation, he argued. In the last 3-month refi implemented under
the ECB’s crisis liquidity framework of full allotment at a fixed rate,
the central bank provided a mere E2.015 billion.

Laurent Bilke of Nomura concurred that, “banks are basically saying
there is enough excess liquidity in the system. And there is.” He
estimated the excess at E200 billion.

In addition, the ECB’s decision to continue the fixed-rate, full
allotment procedure “for as long as necessary, and at least until the
end of this year’s ninth maintenance period on 12 October 2010″ will
have reassured banks that they’ll have access to liquidity if they need
it, Bilke said.

Barclay’s Callow said the “surpassingly low” uptake is “evidence
that the banking sector is continuing to proceed back to normal
conditions.”

Just as the ECB was pleased by far lower bidding in the last
12-month tender, so it “will be equally pleased that the amount of
bidding has subsided to radically.”

Analysts also said that the outcome of today’s tender does not
significantly change liquidity conditions and should keep EONIA rates
relatively stable until June, when a whopping E442 billion from the
first 1-year refi in June 2009 will expire.

–Frankfurt Newsroom +49 69 72 01 42: email: frankfurt@marketnews.com–

[TOPICS: M$X$$$,M$$EC$]