FRANKFURT (MNI) – The European Central Bank Tuesday drained E66.0
billion from the banking system in a one-week liquidity-absorbing
operation intended to sterilize the ECB’s purchases of Eurozone
government bonds.

The amount drained matched the total volume of government bonds
purchased by the ECB and settled as of last Friday and was up from the
E65 billion drained previously. On Monday, the central bank reported
that it had purchased E713 million in sovereign debt on the secondary
market during the week ending November 19.

Last week’s purchases mark the third time the ECB’s has
participated in the sovereign debt market after remaining on the
sidelines for most of October, although that amount remains below the
E1.073 billion in bonds that the ECB purchased earlier this month when
spreads on both Irish and Portuguese debt hit record highs.

Spreads on debt from both countries have since narrowed. However,
despite the bailout package announced for Ireland recently, spreads in
both Ireland and Portugal, as well as Spain, have begun to widen again,
suggesting that markets have discounted the impact of the bailout and
that they fear contagion could prompt other Eurozone states to seek
financial assistance.

With Moody’s threatening to reduce Ireland’s debt rating and the
Irish government losing its majority in Parliament, the market is
unlikely to see a pause in ECB buys in the short term.

Sixty banks placed bids totaling E91.432 billion, the ECB said.

The weighted average allotment rate for today’s operation was
0.45%, the lowest rate was 0.35%, and the highest rate accepted, or the
marginal rate, was 0.51%, the ECB reported.

The drained liquidity takes the form of fixed-term deposits. These
can be used as collateral in the Eurosystem’s refinancing operations.
The central bank will hold another liquidity-absorbing operation next
week to reabsorb this week’s term deposits when they expire, as well as
any additional amounts that might be injected into the financial system
in the event of new bond purchases.

— Frankfurt bureau: +49-69-720 142; email: frankfurt@marketnews.com —

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