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ECB’s LTRO money parked straight back

It was a relatively quiet day in terms of economic data, and news headlines were populated with updates following the ECB’s 3 year LTRO. Perhaps expectedly, we learnt that the money taken by financials intuitions has been parked with the ECB in its overnight deposit facility. With the LTRO money being received yesterday, reports this morning indicted that a record €776.9 billion had been deposited straight back with the ECB at a rate of 0.25%. This represents a negative carry (in contrast to the positive one that the process was designed to instigate), as money borrowed at 1% is currently earning 0.25%. It shows that banks are still fearful of interbank lending and, if the situation persists, would undermine the success of the project as the money is supposed to be lent out to corporations and benefit the real economy. On a shorter term horizon however commentators have suggested the move was to be expected as banks take stock before deciding what to do with the inflow of new money.

We also learnt that Barclays couldn’t resist the allure of cheap cash, the group announcing that it acquired €8.2 billion in this week’s LTRO, with the group highlighting that it would use the money to fund gaps in Spain and Portugal.

On the Eurozone front, 25 out of the EU’s 27 nations signed up to the new fiscal pact that is designed to impose “German style” rules on deficits and debts. The UK and the Czech Republic opted out. Reassuringly for many, Angela Merkel demonstrated she was not complacent about the ongoing issues and cautioned that the ECB has bought Europe time but it must not be wasted.

Banking stocks were higher following a sector upgrade to “Overweight” at Goldman Sachs. Lloyds and Barclays ended the day higher as did the financial services groups Man Group and ICAP. The FTSE 100, having started the day in positive territory, lost ground throughout the afternoon and ended 0.3% lower at 5911, in line with major European indices.

This was posted in Bdaily's Members' News section by James .