Fearing ECB Liquidity Miracle

As the analysts at Barclays Capital put it yesterday:

A litmus test for European bank funding – On 1 July, European banks need to repay the ECB €442bn that they borrowed a year ago. To smooth the process, banks can refinance with the ECB at 10am (BST) the day before – but on less attractive terms. How reliant will the sector be on ECB “life support” now that the effective cost is going up?

Click on chart, courtesy of Barclays Capital.

Nordea Markets clarifies the time-table today:

The liquidity situation in the Euro-zone banking system is likely to see notable changes this week, as the ECB’s first 1-year refinancing operation with an outstanding amount of EUR 442bn will mature on Thursday. The big question of course is, how much of this will be rolled over and what effects it will have on the markets. The ECB offers banks the chance to roll the maturing operation into a 3-month or a 6-day operation. The results of the 3-month tender will be announced tomorrow, and they will reveal a lot of the upcoming changes in liquidity. However, the demand at the 6-day operation will not be known until Thursday.

Click on charts to enlarge, courtesy of Nordea Markets.

While Spanish Banks Rage at End of ECB Offer, some are playing fairly relaxed games of LTROops. Economists at Societe Generale conclude today:

Although excess liquidity in the system is likely to decline, we believe it will do so only very little. Hence, money market liquidity will in our view remain very ample, implying only the mildest of increases in money markets.

Plenty of offers to replace the €442bn refinancing.

Click on charts to enlarge, courtesy of Societe Generale.

Watch out!