ECB Coordinates With Other Central Banks To Provide Liquidity Through Year End

The ECB announced that, in coordination with the Fed, the BOE, the BOJ and the SNB, to conduct 3-month USD liquidity operations for 3 times through the year. In addition to the 7-day USD facility announced on May 10, 2010, the new operation aims to ensure sufficient liquidity in banks. The offerings will be carried out at in the form of repo, at fixed rate and with full allotment. Tender dates will be October 12, November 9 and December 7. The move had sent stocks higher on improved sentiment as central bankers attempted to ease liquidity problems associated to Eurozone's sovereign debt crisis. The euro advanced.

After the collapse of Lehman Brothers in October 2008, the ECB launched the USD liquidity facility in order to meet liquidity demand from the stressed banking system. All operations were discontinued in January 2010 as the funding market improved and demand reduced. However, as the Greek debt crisis began in May 2010, the ECB reactivated the 1-week USD liquidity facility and introduced a special 3-month operation as banks turned more reluctant to lend money to each other again.

The 1-week operation had lacked demand since February this year but a single bidder was reported to have borrowed $500M at a fixed rate of 1.1% on August 18. As we mentioned at that time, this signaled intensified stress in the region's money market conditions. Earlier this week, the ECB said that 2 more banks borrowed a total of $575M via the operation, evidencing rapid deterioration in the banking system in the Eurozone.

Yesterday's announcement marked a step forward to inject liquidity to the market. We believe it would give relief in the short-term but would not help solve the problem. Indeed, we view the move as an indication of the seriousness of deterioration in market sentiment in recent months and world central bankers have envisaged further tightening in the region's banking system going forward. Some market participants said the move was a prelude to the Fed's QE3. We expect the Fed, at next week's meeting' will not deliver anything more than so-called 'operation twist' -increasing the average maturity of securities holdings by swapping holdings of lower maturities Treasuries with longer ones.