ECB released its weekly statement for the week ending on 22 June. Although the past week was highlighted by a significant increase in risk apetite (with a corresponding fall in Spanish/Italian sovereign yields), the statement still outlines considerable stress in money markets:

Asset Side

On the asset side, total USD liquidity-providing operations (7 and 84-day) increased from $8.7bn to $11.5bn (+2.8bn), marking a long trend of growth in USD swap usage. Lending to credit institutions increased by €34.2bn this week through a larger MRO of €167.3bn. On the other hand, ‘Other Claims’ (ELA) decreased by €5.3bn, lowering total liquidity creation to a bit under €29bn. It seems that Greek deposit outflows probably reversed course and returned to home country banks.

Liabilities Side

Bank reserves were lower by €21.2bn, mainly due to a large decrease in current accounts (€53.9bn) while usage of the deposit facility was larger by €34bn (with most of the change probably relating to reserve ratio maintenance). General government accounts on the other  hand  grew €42.3bn.

Liabilities to non-euro area residents continued to increase, this week growing by €10.9bn. Even if we account for growth in USD swap usage, outflows from the Euro area kept their upward trend. As the chart below highlights, (since end of March) the ECB balance sheet expansion has been mainly used to finance outflows from the euro area (or USD funding not available in the private markets) with a total net change of more than €73bn. The sovereign crisis has started to morph in a euro confidence crisis.


This week’s MRO was again larger than the maturing one (at €180.4bn, up €13.1bn from €167.3bn). Continued and increasing resource to the weekly refinancing operations makes it clear that the 3Y-LTRO excess liquidity is quite used up.

Spanish T-Bill auction

Today, Spain auctioned 3 and 6-month T-Bills. Rates settled at 2.362% for the 3-month bills and 3.237% for the 6-month.Given the fact that the ECB will continue to provide 3-month LTROs (it just announced a new one with 27/6 as tender date) and Spanish banks can post these securities to the ECB with minimum haircuts (to borrow at the MRO rate) and avoid any liability mismatch, these rates are a disaster and show lack of demand even from domestic players, at least without a very large premium. The results are even more worrying if one accounts for the fact that T-Bills are not considered to have any significant default risk (based on the Greek PSI experience). Comparing the t-bill rates with eurepo rates (a bit under 0.1% for both 3 and 6 month tenors) paints an even darker picture.


Cyprus government bonds are no longer eligible as collateral for refinancing operations with the European Central Bank after the country’s credit ratings fell below the minimum standard (from all rating agencies) following the bailout request by the local government. That will probably lead to an increase in ELA liquidity from the central bank of Cyprus which already provides a substantial amount of it to local banks (equal to €5.7bn in May while lending through refinancing operations was close to €6.1bn).