The markets were left scratching their heads a little this morning after discovering that the total cash repaid by banks who participated in the ECB's first three-year Long Term Refinancing Operation (LTRO) was only EUR 61 billion, compared with market estimates that ranged from EUR 100bn to EUR 150bn.
What did this mean? On the one hand, maybe banks decided to hang onto this long-term liquidity as a "Berlusconi hedge" against Bunga Bunga doing surprisingly well in this weekend's elections. After all, it was under his watch that Italy came to the brink of disaster only a short time ago and his nationalist, populist, anti-German agenda would spook markets if he emerged with much influence. Italian bond yields would soar, bank stocks would suffer and maybe the interbank lending markets would freeze over again.
The LTRO liquidity is a little pricey by some measures. Big banks could certainly borrow more cheaply in the markets than the rate on the LTRO - the ECB's refinance rate is 0.75 per cent. But you know what? Liquidity is the banks' oxygen supply and paying a small premium to be alive is a price worth paying. Anyway, if peripheral country economies don't pick up soon, even the ECB will be forced to help by cutting the refinance rate and maybe even taking the deposit rate negative, in which case the LTRO rate would move lower also.
Banks also have the opportunity to repay each week, so we may see a big repayment next week if Italy seems to have elected a stable, reform-friendly government.
All of this led unsecured Euribor rates lower, as the deduction was that the huge pile of excess liquidity in the system -about EUR 500bn - would remain ample to keep market rates low and going lower.
So now it's all down to the Italian voter and it's hard to see an outcome that is excessively positive - the best the market can realistically hope for would be a pretty strong showing by the parties of the centre-left and a willingness on the part of Mario Monti's centre-right to make post-election deals with them / as opposed to his pre-election pronouncements.
The worst is a stronger than expected Berlusconi showing, or even a just a world in which his party has the power to slow down reforms and fight back against Berlin.
The risks seem somewhat asymmetric to me and suggest a lower EUR next week on the balance of probabilities.
What did this mean? On the one hand, maybe banks decided to hang onto this long-term liquidity as a "Berlusconi hedge" against Bunga Bunga doing surprisingly well in this weekend's elections. After all, it was under his watch that Italy came to the brink of disaster only a short time ago and his nationalist, populist, anti-German agenda would spook markets if he emerged with much influence. Italian bond yields would soar, bank stocks would suffer and maybe the interbank lending markets would freeze over again.
The LTRO liquidity is a little pricey by some measures. Big banks could certainly borrow more cheaply in the markets than the rate on the LTRO - the ECB's refinance rate is 0.75 per cent. But you know what? Liquidity is the banks' oxygen supply and paying a small premium to be alive is a price worth paying. Anyway, if peripheral country economies don't pick up soon, even the ECB will be forced to help by cutting the refinance rate and maybe even taking the deposit rate negative, in which case the LTRO rate would move lower also.
Banks also have the opportunity to repay each week, so we may see a big repayment next week if Italy seems to have elected a stable, reform-friendly government.
All of this led unsecured Euribor rates lower, as the deduction was that the huge pile of excess liquidity in the system -about EUR 500bn - would remain ample to keep market rates low and going lower.
So now it's all down to the Italian voter and it's hard to see an outcome that is excessively positive - the best the market can realistically hope for would be a pretty strong showing by the parties of the centre-left and a willingness on the part of Mario Monti's centre-right to make post-election deals with them / as opposed to his pre-election pronouncements.
The worst is a stronger than expected Berlusconi showing, or even a just a world in which his party has the power to slow down reforms and fight back against Berlin.
The risks seem somewhat asymmetric to me and suggest a lower EUR next week on the balance of probabilities.
