The ECB released its weekly statement for the week ending at 1 June 2012. A few comments:

Assets Side

Loans to credit institutions increased by €13.8bn, mainly due to an increase in MROs. ELA increased by €4bn (entry ‘Other claims on euro area credit institutions ‘). What is worrying is that in the previous weekly statement we had a very large increase in ELA (and a decrease in normal refinancing operations) due to problems with Greek banks having negative capital. Although banks were recapitalized (with €18bn) on 28/5, there was no obvious reversal in ELA lending, on the contrary both ELA and the MRO increased substantially. These are  clear indications of a very stressed environment and of a probable ‘hidden’ capital flight financed by NCB liquidity operations.

Liabilities Side

On the liabilities side, the large increase in bank reserves (€4bn in current accounts and €24.9bn in the deposit facility) was coupled with a drop of €24.9bn in general government deposits (which would probably explain the increase in the deposit facility). Banknotes increased by €5bn. What is worrying is the €9.2bn increase of the entry ‘Liabilities to non-euro area residents denominated in euro’ which probably corresponds to capital flight to foreign currencies (such as the Swiss franc with the SNB maintaining a currency floor which would imply possible increases in its euro reserves). The corresponding entry has been on an upward path during the recent weeks:

Overall, my view of the Eurosystem has not changed since last week: A stressed liquidity environment probably exists in certain periphery countries while a general (but still limited) capital flight from the Euro is visible. Monthly statements for May from the NCBs will be quite interesting.

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