FRANKFURT (MNI) – The European Central Bank on Thursday allotted
E111.237 billion in its widely anticipated six-day fine tuning
operation, considerably higher than expected.

The liquidity was provided at a fixed rate of 1% and on a full
allotment basis — the ECB satisfied all of the 78 bids received.

The six-day refis, which expire July 7th, are intended to smooth
out markets in face of today’s expiration of E442 billion from the
1-year LTRO last June. On Wednesday, banks took just under E132 in a
3-month refinancing operation conducted on a fixed rate, full allotment
basis.

That was considerably below projections and lead to expectations
that most of the surplus liquidity in the money market would vanish with
the reimbursement today of the E442 billion.

In light of Wednesday’s lower-than-expected uptake of three-month
funds, markets had turned their eyes on today’s smoothing operation to
see how much would be allotted and thus just how low excess liquidity
would drop.

Today’s allotment compared with expectations that ranged from E10
to as high as E75 billion. Therefore, surplus liquidity remaining in the
system — at least until today’s ops expire — will be considerably
higher than had been anticipated.

Wednesday’s 3-month auction combined with the E442 billion 1-year
expiry left surplus liquidity in the system at an estimated E15-E25
billion. With today’s fine tuning operation, that figure rises to about
E126-E136 billion, which should help ease pressure on short-term market
rates, at least for now.

Overnight EONIA was trading at 0.40/0.60% after the announcement,
down from 0.5%/0.7% prior to it. Three-month EONIA rose slightly,
however, to 0.525% from 0.5100% before the announcement. But Dec Euribor
reversed a 3-tick loss in the immediate aftermath of the announcement.

The higher-than-expected uptake is likely to dampen the feel-good
sentiment from Wednesday’s three-month operation, when analysts said the
low allotment augured well for the health of the banking system. Today’s
uptake could well bring some of the doubts back to the fore.

Though today’s E111.2 billion will leave the system on July 7,
there will be a new weekly main refinancing operation one day before
that. At the weekly MRO, banks can draw funds on a full-allotment basis,
thus replenishing — if they choose to — any decline in surplus
liquidity from the expiry of today’s fine tuning operation.

–Frankfurt bureau. Tel: +49-69-720-142. Email: frankfurt@marketnews.com

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