Tuesday September 23, 2014 Search
Weather | Athens
33o C
20o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Draghi grapples with money markets showing revival too soon

By Jeff Black & David Goodman

Mario Draghi may need to take action to stop money-market investors getting ahead of themselves.

For the first time since 2008, overnight interbank rates are starting to exceed the European Central Bank’s benchmark interest rate, signaling a return to pre-crisis behavior even as the economy remains fragile. That’s testing the ECB president’s promise that officials are ready to respond to any unwarranted monetary tightening.

While rising market rates could be a sign of normalization against the backdrop of a healing euro-area economy, the risk is that they increase loan costs for companies and households too fast and endanger that recovery. Draghi may steer against exuberance as soon as this week by deploying policies considered since last year, such as ending the absorption of cash from crisis-era bond purchases, according to banks including Societe Generale SA.

“The ECB believes only in a very gradual recovery,” said Anatoli Annenkov, senior European economist at Societe Generale in London. “From that perspective, they’d probably be happy to push money-market rates as low as possible.”

The average cost of overnight, unsecured lending between banks in the euro area was 0.254 percent last month, three times as high as a year earlier. The measure, known as Eonia, spiked to 0.457 percent on April 29, the highest excluding month-end volatility since 2011. The ECB’s main refinancing rate has been at a record-low 0.25 percent since November.

Unlimited Cash

In normal times, when the ECB rations the funds it lends to the system, Eonia hovers just above the benchmark rate as lenders unwilling to pledge collateral for central-bank cash access the financial markets for a small premium. That relationship broke down in October 2008, a month after the collapse of Lehman Brothers Holdings Inc., when the ECB responded to the ensuing cash crunch by offering unlimited funding against eligible collateral.

The cost of 3-month funds, which are more representative of borrowing for the real economy, is also showing a revival. Euribor is about 10 basis points above the ECB’s benchmark rate, the biggest spread since before the central bank injected about 1 trillion euros ($1.4 trillion) into the financial system at the end of 2011 via 3-year loans to banks.

Liquidity accidents

The trend could simply be a sign that banks are becoming less reliant on the ECB as the economy rebuilds, according to HSBC Holdings Plc.

Excess liquidity in the euro-area financial system, or the cash above that needed for normal functioning, has fallen as banks make early repayments of the 3-year loans. The indicator has dropped from more than 800 billion euros in March 2012 to as low as 80 billion euros on April 29. It rebounded to 175 billion euros on May 2.

“As fragmentation in the banking system eases, a decline in excess liquidity should lead the short-end money market rates to converge toward the refi rate, which is what we are witnessing,” said Subhrajit Banerjee, an analyst at HSBC in London. “We do not see imminent pressure on the ECB to act just yet.”

Even so, tighter and more-volatile markets increase the risk of what Draghi has described as a “liquidity accident.” The 30-day historical volatility for Eonia is the highest since at least 2004, an added concern for banks already dealing with a yearlong health-check before the Frankfurt-based ECB takes over supervision duties in November.

Policy makers meet in Brussels on May 8 to set monetary policy amid mixed economic signals and an inflation rate that’s still less than half their goal. In a speech in Amsterdam on April 24, Draghi said any “undue tightening” in the monetary stance could be met with measures including an extension of the policy of granting banks unlimited cash or offering new long-term loans.

Executive Board member Benoit Coeure, who is responsible for market operations, has said the policy of meeting banks’ cash demands in weekly auctions is the most-powerful tool to manage the functioning of the market. The 7-day tender settled on April 30 added more than 50 billion euros to liquidity after the spike in rates the previous day. Eonia dropped to 0.126 percent by yesterday.

The ECB will announce the result of its latest 7-day tender today. It forecasts an allotment of 102.5 billion euros, down from 172.6 billion settled on April 30, because of the drop in market rates over the last few days.

Liquidity drain

The central bank will also announce the outcome of its weekly liquidity drain related to the Securities Market Program. The operation is intended to mop up cash injected under the SMP, a bond-buying exercise that was started in 2010 as Greece teetered on the edge of bankruptcy. The absorption failed for a third week on April 29, signaling a desire among some banks to hold onto the liquidity.

Halting the weekly drain would add about 170 billion euros to the system, the value of the bonds still outstanding. Policy makers have so far declined to take that step, with Draghi telling reporters in February that the effects would be “relatively limited.”

That provides an argument for other options such as tweaking the marginal lending facility. Cutting the penalty lending rate, currently at 0.75 percent, would lower the effective ceiling for money markets and help rein in the volatility, according to Benjamin Schroeder, a rates strategist at Commerzbank AG in Frankfurt who says excess liquidity should be high enough to provide banks with an adequate buffer.

“The ECB would need to target a daily level of a little above 100 billion euros to keep Eonia steady just below the refinancing rate,” Schroeder said. “The ECB should also increasingly mull over liquidity interventions, such as stopping the SMP tender.”

While the ECB could yet take unprecedented steps such as charging banks to deposit cash overnight, economists view that as unlikely this month. Just two of 53 respondents in a Bloomberg News survey predicted the deposit rate, which has been at zero since July 2012, will be cut. Two out of 58 economists forecast a reduction in the key rate.

“In the past few weeks, we have seen increasing volatility in money markets,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “Now the ECB needs to decide if they want normalization, or if they have to do something.” [Bloomberg]

ekathimerini.com , Tuesday May 6, 2014 (10:52)  
Programs target return of 21,000 jobless to work
Employment in commerce keeps sliding
Eurobank capital increase sends FDI soaring
Banks may get 3-billion-euro safety cushion
Jailed GD MP shown teaching kids how to give the Nazi salute [Video]
With weeks to go before Golden Dawn much-anticipated trial starts, fresh evidence has emerged exposing the party’s Nazi roots. Footage released by Kathimerini on Sunday shows GD number two C...
Defendants handed prison terms over Antipnoia stabbings
Two men believed to be members of the neo-Nazi Golden Dawn party were sent to prison on Monday after an Athens court convicted them over the stabbing of a Greek and a Spanish national at the...
Inside News
SOCCER
PAOK joins Olympiakos on top after win at Agrinio
Olympiakos spent just two nights alone on top of the Super League, as on Monday evening PAOK joined the champions on 10 points through its 1-0 victory at Panetolikos. The Thessaloniki giant ...
SOCCER
Reds beat Veria to claim league lead
Olympiakos thumped hitherto Super League leader Veria 3-0 on Saturday to go alone on top of the table for the first time after four rounds of games. Four days after putting three past Atleti...
Inside Sports
COMMENTARY
So near and yet so far
Here we are again, so near and yet so far from the coast, in a balancing act of fear between disaster and blurred normality, yet with serious prospects of recovery. Our partners and creditor...
EDITORIAL
Transfer withdrawal
There appear to be significant changes afoot at Greek universities. Academics interested in managing educational institutions – as opposed to exchanging favors with unionists and party folk ...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Jailed GD MP shown teaching kids how to give the Nazi salute [Video]
2. Defendants handed prison terms over Antipnoia stabbings
3. Samaras to meet Merkel in Berlin for pivotal talks
4. Commission report highlights Erasmus student exchange benefits
5. PAOK joins Olympiakos on top after win at Agrinio
6. Programs target return of 21,000 jobless to work
more news
Today
This Week
1. Alexander the Great's tomb not at Amphipolis, says Culture Minister
2. Venizelos denies jihadis are being trained in Greece
3. Euro touches 14-month low before Draghi testimony
4. Civil servants' union calls new strike over evaluation
5. Draghi effect subsiding leaves pressure building on ECB chief
6. Investors snap up euro zone banks, exporters in ECB bet
Today
This Week
1. Greece at bottom of social justice scale among EU28
2. ‘Greece can meet its needs on its own’
3. Central Athens traffic restrictions back in force on Monday
4. Lost in the fog
5. Record sum of new debts to the state in August
6. Democracy under Pressure | Live Streaming
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.