Add a new risk to the continuing euro debt crisis: The European Central Bank itself.
The bank’s one-year special liquidity facility runs out on June 30—and the bank has apparently decided not to renew the $543 billion program that supplied liquidity to the Euro Zone banking sector.
The special facility had provided one-year money to banks at 1%.
Instead the central bank will offer a special 6-day funding designed to get banks to the regular offer of 7-day funding next week.
And the central bank, starting tomorrow, will also offer unlimited 3-month liquidity. The odds are that the bank will follow that 3-month offer with other 3-month offerings to carry banks to the end of the year.
As you can imagine, Euro zone banks aren’t thrilled to see a one-year offering replaced by 7-day and 3-month liquidity.
The one-year term of the earlier special facility had provided stability and visibility to banks at a time when the markets for short-term commercial paper still aren’t functioning. In normal times banks would borrow in the short-term in the commercial paper markets and then simply roll over that short-term paper when it matured into new short-term issues. With those markets still closed to many Euro zone banks, bankers worry about their ability to roll over 3-month paper when it matures.
The end of the special facility is part of the European Central Bank’s strategy of gradually ending the extraordinary measures it took to supply liquidity to the financial system after the collapse of Lehman Brothers and American International Group.
No one disputes that the central bank should end these extraordinary measures sometime, but banks are screaming, “Not yet. Wait until the commercial paper market is open to us again.”
Of course, the commercial paper market isn’t going to recover very quickly as long as the European Central Bank keeps flooding the market with cash.
Absent the results of the bank stress tests due to be released in mid-July no one knows exactly how bad off the worst Euro zone banks are or how many banks are in that worst-case group. The stress tests are likely to make it easier for the strongest banks, such as Banco Santander (STD), to raise funds because the capital markets will stop lumping the good and the bad banks together.
But the stress tests, if honest and extensive, are likely to make it even harder for the worst case banks to raise funds.
At that point the European Central Bank is going to have to figure out how to handle the next phase of a crisis that just seems to go on and on and on.
Any hope that the European Central Bank might be able to withdraw from the capital markets is likely to prove rather fleeting.
I’ve got to wonder why the bank thinks that ending the special liquidity facility today is even worth the effort when the next stage of the crisis is just about two weeks away.
STD and ITUB look interesting here, esp if the “stress tests” confirm their relative strength…
A bit off topic:
Here was a funny piece of news I saw on BBC yesterday. Estonia has completed just about all of the requirements to join the Euro zone. To do so they had to cut government spending by 20% for a significant period of time (20% is a lot more than any of the PIIGS have even proposed so far). They must be crazy! Why don’t they jump into a vat of boiling acid instead? Or maybe send all of their troops that aren’t in Afghanistan on a blitzkrieg into Russia. Either of those moves would seem to me to make more sense than joining the Euro zone. Welcome Estonia — now hand over some cash to help Greece, Spain, Portugal, maybe Ireland, and Italy — shiver me bones.
I think that the ECB may just be thinking it doesn’t want to throw any more good money after bad money?
ojunker
your post was interesting and relevant up til your little gratuitous anti obama zinger.
Jim or Ed
Off subject but one thing that could really send markets down even more is the whole Iran nukes issue. Leon Penetta admited this weekend that within 2 years Iran will have nuke missles ready.
I truly believe Israel will have to attack sooner than later and that will throw another wrench into the mix.
I do not believe sanctions will work on Iran…..the only way I can think of bringing economic pain is to have Obama start running their economy:)
Do you think this is some sort of weird retaliation to Chinese protectionism and surplus mercantilism? The whole timing of these central bank tightenings, G20 budget agreements, and the Chinese currency announcement are completely odd to me. It’s almost as if certain Western leaders got fed up with the surplus countries and said “fine, we won’t go protectionist as well, but we’re not carrying you any longer either. We’ll let the recovery slide and you can figure it out. We suggest you start spending accumulated surpluses. That’s how the system was designed to work.”
Protectionist retaliation undertones have been making waves, and it looks to me like beggar policies will come if the surplus countries don’t give a little.
Gold continues to go up. The only thing governments can’t devalue.
It appears that there is a European Tea Party that has more influence on fiscal policies there, than the American Tea Party movement has here. The November elections will show us whether the Tea Party movement will elect enough officials to implement tighter fiscal policies and curtail bank bailouts in the USA.