ECB says to start term deposits to offset bond buys

inspector_monkfish

14:34 17May10 ECB ANNOUNCES DETAILS OF PLANS TO STERILISE GOVERNMENT BOND PURCHASES
14:34 17May10 ECB - TO CARRY OUT QUICK TENDER ON MAY 18 FOR ONE-WEEK DEPOSITS
14:34 17May10 ECB - TENDER WILL BE VARIABLE RATE, MAX BID RATE 1 PCT
14:35 17May10 ECB - INTENDS TO MOP UP 16.5 BLN EUROS AT TENDER
14:35 17May10 ECB - SECURITIES MARKET PROGRAM IS WORTH 16.5 BLN EUROS TAKEN PURCHASES SETTLED BY MAY 14 INTO ACCOUNT
14:36 17May10 ECB - FIXED TERM DEPOSITS ARE ELIGIBLE AS COLLATERAL IN REFI OPERATIONS
14:36 17May10 ECB - WILL CARRY OUT ANOTHER OPERATION TO ABSORB LIQUIDITY NEXT WEEK
14:41 17May10 ECB says to start term deposits to offset bond buys

FRANKFURT, May 17 - The European Central Bank said on Monday it would neutralise the impact of the government bonds it is purchasing by collecting one-week deposits at variable rate tenders.
The ECB also revealed as of Friday it had bought 16.5 billion euros ($20 billion) worth of bonds under its new government bond purchase programme.

The ECB said on Reuters information page <ECB35> that it would call for bids on Tuesday offering banks the chance to deposit funds and earn interest of up to 1.0 percent.

The euro zone's central banks began buying bonds last week after the ECB abandoned a long-held resistance to it as part of a $1 trillion attempt to resolve the crisis gripping the region.

1984ReturnsForReal_2

Are the England and Wales Cricket Board going into banking?

inspector_monkfish

12:52 18May10 - ECB mobbed by banks as it sterilises bond buys
* ECB drains intended 16.5 bln euros to sterilise bond buys
* Bank try to deposit almost 163 billion euros



FRANKFURT, May 18 - The European Central Bank was mobbed by commercial banks on Tuesday as it drained 16.5 billion euros out of the euro zone's banking system to offset the extra liquidity it has created by buying government bonds.
The ECB said 223 banks bid to deposit a total of 162.74 billion euros at the central bank over the next week, almost 10 times the 16.5 billion target it had set itself.

Euro-zone central banks started buying government bonds last week in a bid to support battered euro zone debt markets. The ECB said it would take one-week deposits from commercial banks to sterilise the purchases, dulling the potential inflationary impact.
It will pay a weighted average interest rate of 0.28 percent on the funds deposited by banks, having offered them up to 1 percent, far higher than they get if they deposit overnight at the ECB.

One money market trader expected banks to bid aggressively and was not surprised by the comparatively low rate of interest paid.

"The bid rate is huge, but with the surplus in the system at 200, 300 billion euros plus it's something we anticipated," the trader said.

"In the market you are getting 0.27 to 0.3 percent (for weekly money) so the fact you get this risk free from the central bank now is very attractive for us."

Another trader at a euro-zone bank added that things would change as the weekly amount the ECB looks to siphon out of markets, increases.

"Next week when it is 50 or 60 yards (billion euros) it will be higher," he said of the average interest rate.

Generali

1984ReturnsForReal wrote: »

Are the England and Wales Cricket Board going into banking?

No, they're just concentrating on the cricket team beating the Aussies again. Oh I've had some fun the last couple of days.

chucknorris

Generali wrote: »

No, they're just concentrating on the cricket team beating the Aussies again. Oh I've had some fun the last couple of days.

Let's hope you get more fun after/during the ashes

Generali

chucknorris wrote: »

Let's hope you get more fun after/during the ashes

Well yes, let's. I'm hoping as a minimum to go to a couple of days at the SCG and a day at the MCG.

Degenerate

So there we have it, the ECB is effectively underwriting Euro-zone sovereign debt. ECB buys dodgy bonds, takes equivalent amount of cash as deposits. When the bond issuers default, the depositors will still get their money back from the ECB, the losses will fall on the ECB and be de facto monetized.

inspector_monkfish

Generali wrote: »

Well yes, let's. I'm hoping as a minimum to go to a couple of days at the SCG and a day at the MCG.

ENGLAND cricket fans were celebrating last night as the national side won a version of the game developed especially for children.

http://www.thedailymash.co.uk/sport/sport-headlines/england-win-at-children's-version-of-cricket-201005172737/

PasturesNew

I didn't understand any of this thread, not even the title.

Degenerate

PasturesNew wrote: »

I didn't understand any of this thread, not even the title.

The European Central Bank started buying Euro-zone countries' government bonds last week. If it did this without taking in deposits to balance the purchases, it would effectively be creating new money. As it thinks there is enough money in the system already, it started taking in deposits today. Because the ECB is the safest place you could possible deposit Euros, lots of banks responded.

inspector_monkfish

16:23 18May10 Sterile Efforts From The ECB



The European Central Bank has proclaimed loudly and at every turn that it
will sterilize the bond purchases it makes under its plan to restore order to
dysfunctional markets. Tuesday, it took in one-week deposits to mop up the cash it spent on bonds at the start of last week. But this effort, intended to paint bond purchases as an extraordinary intervention rather than monetary policy - or worse, monetization of debt - looks like window-dressing in light of the enormous liquidity being provided elsewhere in the system, and the bigger doubts over the particular bonds being bought.

At the moment, banks have the whip hand: they have access to unlimited
amounts of ECB lending as a result of measures to ease money-market tensions
sparked by the subprime crisis and increased by the collapse of Lehman Brothers and now the sovereign debt crisis. As a result, they determine the level of excess reserves in the system. And there is a lot of liquidity around: the ECB took EUR16.5 billion of one-week deposits Tuesday to match its bond purchases, but banks were willing to deposit nearly 10 times that amount, underlining the relative insignificance of sterilization. Even these deposits can be borrowed against, meaning the liquidity could re-enter the system elsewhere.

So why go to all the effort? There are good symbolic reasons for the ECB to
attempt to show that the bond purchases aren't part of monetary policy by making a direct and offsetting absorption, JP Morgan notes. The intention must be to eliminate any fear of inflation - particularly in Germany - as a result of the bond purchases. But inflation isn't a problem at present, coming in at just 1.5% in April and likely to come under further downward pressure. Meanwhile, the one-week maturity of the deposits and the idea liquidity could leak back into the market undermine the symbolic value.

But the valid debate over inflation shouldn't distract attention from
another, more immediate concern: that the ECB is buying government bonds no one else wants to buy, particularly from Greece, which contain substantial credit risk. The biggest challenge may not be sterilization, but the infection of its own balance sheet.