Health Of The European Banking System So Far ...

From the economists at Tullett Prebon today:

On the other side of banks’ balance sheets, in the cash market, yesterday’s alarmingly low take of €131.9bn at the ECB’s 3-month tender - compared with the Reuters Poll market consensus at €210bn - lifted the overnight funds rate, Eonia, to 0.542% from 0.325% the day before. Off the back of this, 3-month Euribor shot up to 0.782% today from 0.767% yesterday, marking the biggest increase since October 2008. As we noted this morning, the result increased uncertainty about the uptake in today’s 6-day operation, which was the second leg of the ECB’s strategy to smooth over the effects of the maturing €442bn 12-month funds today. The ECB allotted €111.2bn in the 6-day tender, in line with Tullett Prebon’s Euro Cash Desk’s prediction of over €100bn.

The combined take of €243bn at the 3-month and 6-day tenders matches our forecast of the €250bn threshold which will be needed to keep Eonia at the 0.3% handle, barring any new bank shocks. Based on Tullett Prebon data, the 1-week Eonia rate has fallen to 0.38% compared with 0.50% ahead of the 6-day ECB auction. However, this is far from an encouraging signal about either the health of the European banking system or about liquidity in capital markets. That banks should opt to raise €111bn from the ECB at 1% when the 1-week market rate is 0.446% and there were €309bn of investable funds deposited at the ECB overnight attests to the acute lack of confidence in risk capital provisions of the banking system.

Liquidity circus so far ...