Wednesday, June 30, 2010

Demand for ECB Loans Falls Short of Some Analyst Expectations

Some 171 banks took just €131.9bn in three-month liquidity, the ECB reported on Wednesday, reports FT. Some analysts were forecasting that banks would demand €250bn or more. But the interest rate charged by the ECB for the three-month loans, in which the central bank met eurozone banks’ demands in full, was 1 per cent – higher than market interest rates.

Those that view this smaller than expected demand for funds as a sign of liquidity in the markets are simply ignoring the fact that the funds, only available at the above market rate, were priced way above market. The real interest rate is simply very low across the globe right now. Put the funds at market rates and the demand would have been in access of 250bn. The market optimism based on the low demand as a sign there is plenty of liquidity in the system is just way off. There is no liquidity in the system and the ECB attempting to provide funds at above market rates is not going to change that.

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