Posted on 12/18/2007 6:56:04 PM PST by JasonC
ECB's liquidity move produces mixed reaction
An aggressive move by the European Central Bank to pump liquidity into the banking system produced mixed reactions in financial markets yesterday.
The ECB supplied 348.6bn to banks in its two-week operation at 4.21 per cent after it scrapped the normal upper limit on the amount it would lend.
Two-week euro Libor was set at 4.40 per cent, down 54 basis points from Monday's fix. The one-month rate fell 33bp and the three-month contract fell nearly 10bp - the biggest drop in six years.
Yet Gabriel Stein at Lombard Street Research warned that if market interest rates remained elevated in early January, the ECB would face real problems. "The ECB - and other central banks - may be running out of policy options," he said.
Sterling Libor rates fell after the Bank of England allotted £10bn at a minimum bid rate of 5.36 per cent - 14bp below the 5.5 per cent base rate.
US equity markets were uncertain about how to interpret the moves. The S&P 500 fell 0.7 per cent in early trading but by the close in New York was up 0.6 per cent. The Dow Jones Industrial Average rose 0.5 per cent and the Nasdaq Composite erased earlier losses to gain 0.8 per cent.
(Excerpt) Read more at ft.com ...
Note the size of the most recent on in that series - 348 billion Euros. That is over half a trillion dollars, folks. Notice also the prior, term refinancings, bringing the recent total injection up to 600 billion Euros, or nearly a trillion US if you add recent Fed and Bank of England actions.
Euro LIBOR rates dropped from nearly 5%, above target rates, to a hair under 4.25 (which is also the US rate on Fed Funds these days). The ECB is playing lender of last resort. And commercial bank appetite for "new money" credit to carry them through the next three months, is, well, large...
time to sell the euro.
Gee, I wonder where they got all those Euros.
Actually I know where they got all those Euros - they got them right out of thin air. What a system. It would be perfect for my wife but, unfortunately, or perhaps fortunately, she is not a Central Bank or even a Federal Reserve Bank. I'm sure the people of Europe who are holding those Euros will feel really good about some banker printing up a bunch of new ones at the Kinko's in Paris. That is about the equivalent of what they are doing.
OTOH it should help the exchange rate which has been in the dumps lately. This is due, as you probably know, to the fact that our Federal Reserve guys have of late been making quite a few trips to the Kinkos Xerox Machines themselves.
Today's action grew the entire bank balance sheet by 25% in one day. The new issuance in this one operation, is equal to half of all Euro currency notes outstanding. Of course the total Euro money supply is larger than that, since it mostly consists of commercial bank deposits, aka the debts of banks other than the ECB itself, denominated in Euros. But this is still well outside the normal, routine scale of open market operations.
As many times as I’ve seen it, it still drives me crazy every time I see the headline writers trying to offer a “proximate cause” for the latest hour’s action in the stock market. For example, more or less from memory, today’s big headline on the Yahoo financial page:
9:45: Goldman Results, ECB Injection Lft Markets
12:30: Stocks Down On Uncertainty Of ECB Action
4:00: Stocks Get A Boost From ECB Move (current headline)
As if somehow the reason for the move was interpreted differently over and over with each passing hour throughout the entire day.
I think the 12:30 “interpretation” is the correct one. If half a trillion of “liquidity” was truly something that would “boost” stocks, then the markets should have not have seen losses, even for a single second, at any point during the day.
The ECB did not turn on the printing presses and give away free money to member banks?
yitbos
Saying that “this is well outside the normal, routine scale of open market operations” is like saying “I heard a boat had an accident” when the Titanic sank. ;-)
This is an open market operation on an unprecedented scale by the ECB. Not only that, but this is way, way outside the “comfort zone” of Euro bankers.
As you noted, the Euro LIBOR rates moved downwards sharply in reaction. What is interesting is how the US/UK LIBOR rates moved almost not at all — the whole of the US bond market just yawned in response to this.
http://www.treasurydirect.gov/news/pressroom/pressroom_reducedpurchaselimit.htm Annual Purchase Limit For Savings Bonds Set at $5,000
FOR IMMEDIATE RELEASE
December 3, 2007
The annual limitation on purchases of United States Savings Bonds will be set at $5,000 per Social Security Number, effective January 1, 2008. The limit applies separately to Series EE and Series I savings bonds, and separately to bonds issued in paper or electronic form
snip...
The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.
Is the government closing the doors to head off bank runs?
Citibank and other money center banks have imposed limits on customers abilities to use free IIS (inter-institutional) wire transfers of more than $2,500 per month for overnight wires, and no more than $10,000 per month for 3-day wires.
American Express has an "Order limit: There is a maximum order size of $1000.00 that can be purchased within a 14-day period. "
https://www210.americanexpress.com/BOLWeb/bolfeOrder.do?request_type=orderProduct&promotion=AMEX&program=TC00000201&selleracctnbr=2539481999I Hmmm very interesting indeed..
A thousand bucks in travelers checks, that won’t work very well for a family going on a vacation.
I know I bought almost that much twenty years ago for a one-week business trip to England, and that was at a better exchange rate, lower prices overall, I was by myself, and I and my company were cheapskates.
How many 0’s are behind that amount?
My Texas Instruments Solar calculator only shows 10 0’s. I will check my logarithm.
...or pennies.
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