The European Central Bank seems to be leaking oil. And as with any oil spill, this could be dangerous.
The inability of the bank to sterilize all bond purchase program Tuesday and essentially leaving an extra € 9300000000 market liquidity that was rejected by many as just another technical hiccup. Although the problem has not arisen for seven months, the ECB has not succeeded in sterilizing six times in the past, in some cases much larger amounts.
So, why worry about this time? Because this time the reason for the leak could be more serious for the ECB and much more damaging for the euro longer term. In any case, the damage is due to the fact that the banking system has failed to accept the offer of central bank short-term deposit interest rate at auction. In other words, banks have preferred to keep their money elsewhere. The ECB can naturally solve this problem in the future, making deposits more attractive for banks.
It may well do so if its support for regional bond markets should increase as the eurozone debt crisis continues to worsen. Sterilization of these markets is a vital part of managing money market the ECB,
without the bank, for all intents and purposes, lost control of monetary policy and be able to deliver the order of stability of prices. Why, then, is the money market in the euro failed to work again at this stage? In the past, previous sterility failures have occurred when the overnight rate on the funds that banks lend to each other (EONIA) is higher than the so-rate refi, banks lent by the ECB.
Thursday, December 1, 2011
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