BLBG: ECB Fails to Attract Sufficient Bids to Mop Up Liquidity From Buying Bonds
The European Central Bank failed to fully offset the extra liquidity created by its bond purchases for the first time in seven months, a sign of mounting tensions among euro-area banks.
The Frankfurt-based ECB said today that 85 banks bid a total of 194.2 billion euros ($259 billion) for seven-day term deposits. It had aimed to drain 203.5 billion euros, the amount its bond purchases have created since the program began in May last year. It last fell short of its intended total on April 26.
“It’s just another indication of how uncertain the situation is,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “At the moment, banks are holding more cash than necessary. There’s a lot of caution.”
While the ECB has failed to “sterilize” its bond program at least four times before, this is the first time it has happened since the central bank expanded the program to buy Italian and Spanish bonds in August. The ECB tries to drain the same amount from the banking system each week that its purchases have created to ensure they don’t swell the money supply and fuel inflation.
The euro fell about half a cent after the ECB’s announcement to $1.3334.
Debt Crisis
The ECB began buying Italian and Spanish debt after Europe’s debt crisis spread. It says the purchases are aimed at ensuring transmission of its interest rates on financial markets. Bond yields have nevertheless risen across the 17- nation euro region as investors lose confidence in Europe’s ability to contain the crisis.
The bond-market intervention has split the ECB council, with Executive Board member Juergen Stark announcing on Sept. 9 that he will step down at the end of the year and Bundesbank member Jens Weidmann also opposing the purchases.
Rabobank economist Elwin de Groot estimated earlier this month that there is a “natural limit” of 300 billion euros the ECB can sterilize. Once it hits the limit, officials will be forced to decide whether they are willing to go beyond the ECB’s official mandate of maintaining price stability, De Groot wrote in a Nov. 8 note to investors.
Some economists say the ECB’s attempts to offset its bond purchases are meaningless because it already lends banks as much cash as they want in its refinancing operations, allowing them to effectively determine the amount of money in the system.
“It’s irrelevant for monetary policy purposes because in some sense the liquidity operations already led to a large expansion of the balance sheet,” said Jens Sondergaard, an economist at Nomura International Plc in London. “And it’s expanding irrespective of whether they’re sterilizing or not.”
The ECB loaned banks 265.5 billion euros in its seven-day main refinancing operation earlier today, the most in more than two years. The number of bidders was 192 compared with last week’s 178.
To contact the reporters on this story: Matthew Brockett in Brussels at mbrockett1@bloomberg.netl; Simone Meier in Zurich at smeier@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
