Europe: Good News and Bad News
The good news is Italy had a relatively successful short-term bond auction this morning. Bidders paid 3.25% in today’s auction for six-month Italian bonds, or roughly half of the cost of the November auction. A bigger test will come Thursday when Italy auctions three-year bonds. We believe this week’s auctions are being managed closely via pressure from the ECB for banks to participate. A better indication of demand for Italian debt will come in the next 30 to 60 days.
The bad news is the funds banks borrowed from the ECB’s three-year loan facility have been parked back at the ECB, rather than making their way into the real economy. From the Wall Street Journal:
The European Central Bank turned the fire hose on the euro-zone banking system last week. The fire is still burning, but the liquidity has simply returned to flood the ECB’s basement — at least for the time being.
The amount of money parked by euro-zone banks in the ECB’s 0.25% deposit facility surged to another new record of €452.03 billion Tuesday, up from €411.81 billion over the Christmas break and well above the previous record high of €384 billion.
Use of the deposit facility is frequently seen as an indicator of stress in the financial system, but the latest surge probably doesn’t reflect any deterioration in the situation since last week. “This is just a mirror image of the liquidity that the ECB is pushing into the system,” said Jacques Cailloux, chief euro-zone economist at Royal Bank of Scotland in London.
From Reuters:
Despite the recent massive liquidity injection by the European Central Bank, banks still appear to distrust each other and prefer to deposit their money at the ECB’s overnight facility than lend to each other.
Latest figures show banks deposited 452 billion euros ($591 billion) at the central bank. Emergency overnight borrowing also remained high at above 6 billion euros.
“This really highlights the reluctance banks have to lend to each other and they would rather take a small loss than go to the inter-bank market,” IG Markets dealer Chris Weston said.
