ECB released its weekly statement for the week ending on 15 June. I feel that i might be starting to sound like a broken record but the stressed environment since last week has not changed one bit:

Asset Side

On the asset side, the 7-day USD liquidity-providing operation increased from $1.5bn to $2.4bn. A marginal increase but still significant, especially since last week’s operation was also $1bn higher than the previous one. Lending to credit institutions increased by €21.2bn this week, both through higher settled amounts at the MRO €(12.4bn increase) and in the 1-month LTRO (€7.9bn)  while resource to the marginal facility also increased by €1bn to a total of close to €3bn.

ELA increased by €2.2bn, which should probably be related to deposits outflows in Greece before this Sunday’s general elections. It will be interesting to see if total amounts decrease this week after Greece elected a pro-bailout government.

Liabilities Side

Bank reserves increased by €16.9bn. What is interesting is the fact that the increase was due to current accounts increasing more than the outflows from the deposit facility. Given the marginal credit expansion in the Euro area and the large liquidity injection through the two 3Y-LTROs, covering reserve requirements should normally only require moving funds from the deposit facility to current accounts. Although the numbers are only aggregates this might suggest difficult conditions for certain credit institutions.

Liabilities to non-euro area residents continued to increase, this week growing by €9.2bn. If one accounts for the increase in the dollar swap (around $0.7bn), outflows from the Euro area (to Switzerland?) continued at a steady pace. Government accounts decreased by €6.1bn.

New MRO

This week’s MRO came much higher than the maturing one (at €167.3bn instead of €131,8bn, an increase of €35.5bn). This amount of increase is definitely alarming, given the current situation in the periphery countries (especially Spain and Italy).

Spanish T-Bill auction

Today, Spain auctioned 12 and 18 month T-Bills. The results were rather terrible with the 12-month auction settling at 5.074% while the 18-month at 5.107%. Given the fact that (Spanish) banks can post the T-Bills to the ECB and receive liquidity at the MRO rate (and the fact that such debt instruments are not included in any debt restructuring as became evident in the case of the Greek PSI which makes them very close to risk-free), these rates should indicate that Spanish banks:

  • are facing very high outflows to the rest of the world with limited access to the interbank market. That increases their cost of funds since most of the liquidity provided by the ECB (LTRO) operations travel abroad while the cost of funds remains with the banks.
  • their capital position is stressed (as is evident in Bank of Spain data) while the opportunities for new profitable loans to the domestic private sector are extremely limited. Only large carry trades on the government debt securities are left to provide banks with profitable positions.
  • fear more rating downgrades on Spanish debt which should push it to the ‘Step 3’ backet where haircuts (on maturities up to 1 year) increase to 5.5% instead of 0.5% and to 6.5% instead of 1.5% (for maturities between 1-3 years). Already LCH increased its margins on Spanish debt, making repos even more costly.

Overall, in my view the Eurozone is in a clear state of slow disintegration. I really hope that realism will prevail as soon as possible.

ps: Italian bond margins were also hiked by LCH.

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