–Adds additional analyst comments

FRANKFURT (MNI) – The limited demand in the ECB’s final six month
tender earlier today shows that there is enough liquidity in the system
and that banks expect to have continued access to cheap funds in the
months ahead, analysts say.

The smaller than expected uptake may also signal ongoing
improvement in the banking sector, analysts observed.

The ECB announced earlier today that it had allotted some E17.876
billion to 62 banks in its final 6-month refi operation. This compared
with a consensus forecast of around E70 billion ahead of the operation,
though the forecast band was very large.

Analysts largely attributed the lower-than-expected outcome to
falling market interest rate expectations coupled with the ECB’s
commitment to maintain fixed-rate, full allotment procedures for weekly
MROs.

“Low demand shows that there is already a lot of liquidity in the
system,” Commerzbank’s Michael Schubert said, adding that it should also
be a reflection of declining interest rate expectations. “The fear of
losing access to cheap funds by not participating in longer-term
operations has clearly declined,” Schubert explained.

This was also reflected in the very small demand for today’s
3-month operation, he argued. In the last 3-month refi implemented under
the ECB’s crisis liquidity framework of full allotment at a fixed rate,
the central bank provided a mere E2.015 billion.

“There is little speculative demand pushing liquidity to excess,”
Alessandro Tentori of BNP Paribas said.

Laurent Bilke of Nomura concurred that, “banks are basically saying
there is enough excess liquidity in the system. And there is.” He
estimated the excess at E200 billion.

In addition, the ECB’s decision to continue the fixed-rate, full
allotment procedure “for as long as necessary, and at least until the
end of this year’s ninth maintenance period on 12 October 2010″ will
have reassured banks that they’ll have access to liquidity if they need
it, Bilke said.

The extension until at least October of the fixed rate, unlimited
allotment on weekly MROs “also gives banks more flexibility in managing
their funding needs,” UniCredit’s Giuseppe Maraffino said. He asserted
that the large amount allotted in yesterday’s MRO (E78.3 billion) shows
that weekly refis are regaining their importance as “the main pillar of
the Eurosystem in providing liquidity to banks.”

“Probably, stricter rules on ABS as collateral to get funding at
the ECB has contributed to reducing demand at today’s auction,”
Maraffino argued.

Barclay’s Julian Callow said the “surpassingly low” uptake is
“evidence that the banking sector is continuing to proceed back to
normal conditions.”

Given improving conditions, banks are increasingly turning to other
sources of finance, Ian Stannard of BNP Paribas argued.

“With the winding down that we’ve seen of other operations, it
looks as if market participants have been turning to other, more
conventional market funding operations over time. This is fairly
consistent with the winding down of these operations,” Stannard said.

Analysts also said that the outcome of today’s tender does not
significantly change liquidity conditions and should keep EONIA rates
relatively stable until June, when a whopping E442 billion from the
first 1-year refi in June 2009 will expire.

However, after the refis from that tender expire, liquidity may
well drop and banks not fully re-line their pockets with weekly funds.

“What we can say about this tender here specifically is that there
seems to be no interest in transporting liquidity into Q3,” Tentori
noted. So there is chance that “excess liquidity is going to be
significantly lower in Q3 and Q4.”

The ECB should welcome the result of today’s tender, analysts
argued.

Just as the ECB was pleased by far lower bidding in the last
12-month tender, so it “will be equally pleased that the amount of
bidding has subsided so radically,” Callow said.

“I don’t think it will change their policy outlined last month, but
it gives them some confidence that they won’t have to go back on that
policy of gradual retrenchment,” Calyon’s Stuart Bennett said.

–Frankfurt Newsroom +49 69 72 01 42: email: frankfurt@marketnews.com–

[TOPICS: M$X$$$,M$$EC$]