–Adds more details, more quotes on ECB liquidity decisions
BRUSSELS (MNI) – The European Central Bank Thursday said it will
extend its generous liquidity provisions into next year but stressed
that the measures are temporary and will be ended as rapidly as markets
permit.
The ECB will maintain full-allotment, fixed rate terms on its
weekly main refinancing operations and on one-month operations for as
long as necessary and at least until January 18, ECB President
Jean-Claude Trichet said. He also said the ECB would conduct three
additional 3-month operations, on the same terms, in October, November
and December. And it will carry out three extra fine tuning operations,
also at a fixed rate with full allotment, to help smooth over market
tensions at the end of the year.
Despite the extension of generous liquidity terms, Trichet said the
ECB was in fact already engaged in a process of “gradual” withdrawal.
“But it takes time,” he said. “It is our hope that we will proceed as
rapidly as possible toward normalisation,” Trichet said. “We are
actively trying to normalise everything in all sectors of markets,” he
added, stressing that the non-standard liquidity measures are temporary.
The bank said the three extra longer-term (ie, three-month)
operations would be October 28, November 25 and December 23. “The rates
in these 3-month operations will be fixed at the average rate of the
MROs over the life of the respective LTRO,” the ECB said.
In addition to this, Trichet said the ECB Governing Council had
committed to offering additional short-term funding when its remaining
6-month and 12-month operations mature, on September 30, November 11 and
December 23. The September and November operations will be for 6 days,
the December operation for 13 days.
The decision to extend the measures – which Trichet said was taken
“by consensus” – was widely expected because many banks in some Eurozone
countries like Greece, Spain and Ireland are still dependent on the
liquidity from the central bank.
Trichet said the non-standard measures were consistent with the
ECB’s mandate and that the central bank was doing everything necessary
to maintain price stability.
The ECB’s decision to extend its unlimited liquidity provisions
into next year had been widely expected after a number of Governing
Council members voiced their support for such a move.
The ECB first introduced its policy of unlimited liquidity
provision after the collapse of Lehman Brothers in the autumn of 2008
severely impaired interbank lending. In March this year, the ECB
attempted to return to the traditional auction method for 3-month
tenders but was forced by the Eurozone’s sovereign debt crisis to make a
sharp U-turn.
Nonetheless, the money market took a step towards normalization in
early July when banks repaid the ECB E442 in expiring 1-year funds and
borrowed back only around half that amount in other refinancing
operations, thus draining a significant volume of surplus liquidity from
the system and pushing up short-term market rates. Throughout the month
of May, when the sovereign debt crisis was beginning to calm down, total
outstanding ECB loans to banks averaged well above E800 billion. By the
end of August that amount had fallen to E590 billion.
Although Eurozone money markets have continued to improve, some
banks, particularly in peripheral Eurozone countries, remain cut-off
from interbank lending. Demand for ECB liquidity was still on the rise
last month in some of those countries, including Spain, Ireland and
Greece.
The central bank is likely to tread very carefully in withdrawing
support as long as some banks in those countries remain dependent on the
ECB for cash. Starving peripheral banks of liquidity could spark a
credit crunch or even potential bank failures, taking the Eurozone’s
sovereign debt crisis to new heights and once again impairing European
interbank lending.
Nevertheless, more hawkish members on the Council may push for a
reduction of liquidity supply at the start of next year, given growing
concerns that the large amounts of surplus cash in the financial system
and low borrowing costs could pave the way for future crises. Council
member Axel Weber already called for a discussion in the first quarter
on resuming the ECB’s exit.
Trichet today did not give any indications about the potential
scope of liquidity provisions beyond the first quarter.
–Brussels newsroom, +324-8780-3655; echarlton@marketnews.com
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