FRANKFURT (MNI) – The European Central Bank said Monday it will
carry out a 1-week variable-rate liquidity absorbing operation on
Tuesday with a maximum bid rate of 1.0% in order to absorb E16.5 billion
that it spent on bond purchases up until last Friday.

Another liquidity-absorbing operation will be conducted next week,
the ECB said.

“As decided by the Governing Council on 10 May, the ECB will
conduct specific operations in order to re-absorb the liquidity injected
through the Securities Market Programme,” the ECB said.

“In this regard, the ECB will carry out a quick tender on 18 May at
11:30 CET in order to collect 1-week fixed-term deposits with settlement
day on 19 May,” it said.

The operation will take the form of a variable rate tender with a
maximum bid rate of 1%, the central bank said.

The ECB aims to drain E16.5 billion, corresponding to “the size of
the Securities Market Programme, taking into account transactions with
settlement at or before Friday 14 May.”

The bank indicated that volume at its weekly main refinancing
operations would not be affected by the bond purchasing program.

“The benchmark allotment amount in MROs takes into account the
liquidity effect of non-standard measures, assuming an unchanged size of
the Securities Market Programme and full sterilization of this amount
via the above-mentioned liquidity absorbing operation,” the central bank
said.

The ECB also said that credit created by fixed term deposits held
at the central bank will be eligible as collateral in the Eurosystems’s
refinancing operations.

The ECB has not disclosed the total volume it intends to spend on
the programme but had promised repeatedly before today that it would
drain all additional liquidity injected.

It said earlier that the share of bond buys will be divided among
national central banks according to their percentage shares in ECB’s
capital — which would make the Bundesbank the largest buyer.

The ECB dropped its long-held resistance to buying government bonds
just over a week ago “to address the malfunctioning of securities
markets and [to] restore an appropriate monetary policy transmission
mechanism”. It did so over the objections of Bundesbank President Axel
Weber and a few other members of the Governing Council.

President Jean-Claude Trichet had telegraphed today’s move last
Friday when he said the ECB would “withdraw the liquidity that we will
inject mainly through tendering term deposits.”

Trichet did not specify potential supplementary draining methods
but assured that sterilizing the government bond purchases “does not
present technical difficulties.”

ECB chief economist Juergen Stark said the central banks would hold
all government bonds until maturity but this has not been confirmed as
official policy.

–Frankfurt bureau; +49-69-720142; jtreeck@marketnews.com

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