PARIS (MNI) – Stronger-than-expected demand for the European
Central Bank’s second three-year LTRO on Wednesday fed hopes that the
abundant liquidity will continue to calm Eurozone market tensions and
allow bond yields in peripheral countries to decline further.

Total demand of E529.53 billion for the three-year loans surpassed
the consensus forecast of around E500 billion, and the E489 billion
injected in the first LTRO in December. Eight hundrend banks bid for the
funds, up from 523 banks at the December operation.

“There is no arguing with E529 billion in borrowing from the ECB,”
said Peter Chatwell, interest rate strategist with Credit Agricole in
London. “This is inevitably going to support risk markets further.”

Peripheral European bond prices rose after the ECB announcement,
while the euro and European equities were little changed.

ECB President Mario Draghi has said that the much of the net
liquidity added in the first LTRO was probably used by banks to repay
their own maturing debt. In recent comments during the G20 meeting in
Mexico Draghi expressed hopes that funds from today’s operation would be
used more for loans that would support economic growth.

“One can infer from the numbers that much of the LTRO has been used
by the banks to repurchase their bonds coming due in the first quarter
of this year,” Draghi said. “One expectation now is that having
satisfied their funding needs for this year at least, the banks will be
more inclined to use this money – which was our primary expectation
really – to expand credit into the real economy,” he added.

Draghi dismissed concerns by some economists that such a dramatic
increase in liquidity could pose risks for the economy.

“We see M3 still declining. We don’t have any sense that this
abundant liquidity is actually translating itself to risks for the
economy,” he said. “We see credit tightening, not credit booming, and
this is true for the whole of the euro area.”

Although the ECB has said that it does not have evidence on how
much liquidity banks are using to purchase government bonds, its first
LTRO in December has proved to be a game-changer for peripheral markets.

Since then, Italian 10-year bonds yields have fallen from 7% to
5.27%, while Spanish 10-year returns have dropped from 6.3% to 4.97%.
Huge demand at Spain’s debt actions, possibly from banks using ECB money
to execute carry trades, has allowed the Spanish Treasury to complete
32.4% of annual funding need in only two months.

In addition to the three-year LTRO, the ECB said Wednesday that it
allotted E6.4958 billion in 91-day funds. With E38.6198 billion expiring
on Thursday, the net drain from the system is E32.124 billion.

Analysts said that banks’ participation in shorter-term refinancing
operations has declined because of the three-year LTROs.

–Paris newsroom, +331-42-71-55-40; jduffy@marketnews.com

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