The European Central Bank failed to sterilize all the bond buying made through the SMP program. As the central bank increased its bond buys by another 8.6 billion euros, it couldn’t drain all the money out of the markets, raising the money supply. This is not the first time that this happens and wouldn’t raise concern if this would have happened earlier.
But things are different now: bond buying has accelerated in recent weeks and the total sum already passed the €200 billion mark. And while the bond buying accelerated, this couldn’t stop the rise in Spanish and Italian yields. These high yields were also reflected in the primary market: recent auctions in Italy and Spain resulted in very high yields, especially for short term lending.
Last week’s uncovered German bond auction was one step forward in bringing QE closer, and this uncovered sterilization is another step forward.
The ECB drains money out of the markets in order to keep the money supply balanced – to avoid printing money and making Quantitative Easing, as British and American authorities have already done. Is the ECB reaching its limit?
And there’s another question raised by Divyang Shah and quoted by Neil Hume at Alphaville:
The only reason we can think of to explain the inability of the ECB to get the necessary deposits is that banks prefer to keep things very liquid and park funds o/n as opposed to over the week. This highlights the fragility of confidence and concerns that a step up in the crisis might require the precautionary funds parked at the ECB to be utilized.
It’s not secret that banks are struggling with funding, and that a credit crunch is looming. Funding in dollars is even harder. Jean-Pierre Chevallier reports about BNP Paribas struggling with dollar funding. Other European banks are struggling as well.
The situation is deteriorating quite fast, but the euro remains relatively stable. Is it the calm before the storm? Wolfgang Münchau said that the euro-zone has 10 days left. No euro in one week? This seems exaggerated, and perhaps the ECB should accept the fact that it cannot fully sterilize and move forward with full QE in order to stabilize the situation. German refusal to do so could cost a lot, also to the Germans.
For more on the euro, see the EUR/USD forecast.