FRANKFURT (MNI) – The European Central Bank Tuesday fell far short
of its stated intentions, draining just E31.87 billion from the banking
system in a one-week liquidity absorbing operation that was intended to
sterilize E55 billion worth of ECB government bond purchases.

The shortfall is a clear sign of rising tensions in the money
market as banks hoard cash in preparation for reimbursement to the ECB
of a E442 billion 1-year LTRO that expires Thursday.

The ECB will compensate for some of the E442 billion lost to the
banking system with a six-day fine tuning operation and a three-month
LTRO on Wednesday — followed by two more three-month LTROs in August
and September. Experts reckon that Wednesday’s three-month operation
could add anywhere from E150 to E250 billion to the money market.

Today’s disappointing term deposit tender result will also raise
questions about the ECB’s vow to sterilize all government bonds it
purchases since there are, for now at least, about E23.13 billion worth
of unsterilized bond buys still in the system.

This was the seventh consecutive weekly term deposit tender since
the ECB announced last month that it would buy bonds to shore up
sovereign debt markets, and it is the first tender that did not drain
the desired amount.

Forty-five banks placed bids totaling E31.86590 billion, the exact
amount drained by the ECB, which means they accepted all bids. Previous
operations, by contrast, had been oversubscribed. Last week’s operation
was over-subscribed by 1.4 times — with E71.560 billion worth of bids
and E51.0 billion accepted.

The ECB also had to pay a lot more dearly this week to garner the
deposits that it did. The weighted average allotment rate for today’s
operation was 0.54%, compared to 0.31% in last week’s operation. The
lowest rate was 0.25% and the highest rate accepted, or the marginal
rate, was 1% — the highest allowable under the rules of the term
deposit program. Last week, the lowest rate was 0.25% and the highest
accepted rate was 0.4%, less than half of today’s high rate.

The drained liquidity from today’s operation takes the form of
fixed-term deposits. These can be used as collateral in the Eurosystem’s
refinancing operations.

There will be another liquidity draining operation next week, the
ECB said Monday.

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

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