Eu­ro­zone banks re­luc­tant to re­turn ECB funds

The Pak Banker - - Front Page -

FRANK­FURT: Eu­ro­zone end-of-year fi­nan­cial mar­ket ten­sions have been high­lighted by the Euro­pean Cen­tral Bank's fail­ure to re­ab­sorb funds it has spent on govern­ment bonds to com­bat the re­gion's debt cri­sis.

The euro's mon­e­tary guardian had planned to ab­sorb €73.5b ($96.5bn) from the eu­ro­zone fi­nan­cial sys­tem - equiv­a­lent to the amount it has spent on govern­ment bonds since May. But eu­ro­zone banks of­fered the ECB just over €60bn.

The op­er­a­tion's fail­ure sug­gested that banks were re­luc­tant to re­turn funds to the ECB be­fore the year-end pe­riod, when they will be un­der pres­sure to show strong liq­uid­ity on their books.

It was only the sec­ond time since the bond-buy­ing pro­gramme was launched in May that the ECB has been un­able to off­set fully sums it has spent on bonds.

The so-called "ster­il­i­sa­tion" of its bond pur­chases is in­tended by the ECB to off­set any in­fla­tion im­pact and make clear that it has not em­barked on US Fed­eral Re­serve-style "quan­ti­ta­tive eas­ing".

The ECB had hoped to be able to wind down its bond pur­chases. But­the es­ca­la­tion of the cri­sis trig­gered by Ire­land's trou­bled banks in early De­cem­ber forced it to re­ac­ti­vate the pro­gramme.

The ECB re­vealed on Mon­day that it had again stepped up bond pur­chases last week, high­light­ing its role in en­sur­ing that bor­row­ing costs did not spin out of con­trol for coun­tries such as Por­tu­gal, Ire­land and Greece, the na­tions worst hit by the debt cri­sis.

Fail­ure by eu­ro­zone gov­ern­ments early next year to re­store in­vestor con­fi­dence in Europe's 12-year-old mon­e­tary union would test the lim­its of the ECB's will­ing­ness to act.

An­a­lysts played down the im­me­di­ate sig­nif­i­cance of Tues­day's failed liq­uid­ityab­sorb­ing op­er­a­tion, how­ever, point­ing out that the ECB would prob­a­bly be able to re­ab­sorb the re­quired amount next week, af­ter the year-end pe­riod.

Martin Van Vliet, Euro­pean econ­o­mist at ING in Am­s­ter­dam, said ster­il­is­ing the bond pur­chases was largely "cos­metic" and the ECB con­tin­ued to pro­vide banks with un­lim­ited liq­uid­ity. Nev­er­the­less, the scale of ECB ac­tions showed "qui­etly but surely they are out there sup­port­ing the mar­ket". Fur­ther un­der­lin­ing mar­ket ner­vous­ness, the ECB re­ported a surge in de­mand in its weekly of­fer of seven-day liq­uid­ity. -PB News

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