FRANKFURT (MNI) – The European Central Bank on Tuesday called for
bids on its 371-day long-term refinancing operation.

The operation, to be conducted with full allotment, will be fixed
at the average rate of the bank’s main refinancing operations over the
life of the LTRO, with interest to be paid at maturity, the ECB said.

Analysts are not expecting demand at the auction to be high, since
banks have already resumed their hoarding of cash.

Unicredit argued in a research note that since the ECB is holding
six 3-month operations with full allotment in 2012 — the last of which
will expire only one month before the 12-month LTRO expiration date —
it might be better for banks to meet their liquidity needs by rolling
over 3-month refis so as to exploit better funding conditions if their
situation improves.

Banks expecting no improvement in their access to liquidity and
looking to improve their liquidity ratios may prefer the 12-month
operation. Unicredit expects part of the demand for the 12-month
operation to come from switches out of the 3-month refis. Should uptake
in the 1-year operation be greater than expected, it could signify a
deterioration in banks’ access to liquidity or reflect the gloomy
economic and financial outlook.

IFRMarkets anticipates around E75 billion will be allocated. It
said policymakers will be hoping that in conjunction with bank
recapitalization plans being drafted by European leaders, they can
dampen the effect of bank deleveraging and prevent a credit crunch.

At the last 6-month LTRO back in August, banks only bid for E50
billion against a background of financial shocks. With plenty of options
to tap ECB liquidity, it seems unlikely that there will be huge demand
for the 12-month operation.

When the ECB conducted the first of its 12-month LTROs in June
2009, it was in the context of declining interest rates and a risk-on
attitude among investors. Banks took advantage of the cheap liquidity to
play the yield curve with Greek spreads against the German Bund falling
by 50%.

Conditions are different now and banks are less willing to pile
into carry trades with as much gusto as they did in 2009.

Wednesday’s 12-month LTRO will settle on October 27 and expire on
November 1, 2012. On December 21, the ECB will hold a 13-month LTRO.

— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —

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