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MNI: ECB Action Unlikely Despite Tight Year-End Collateral

(MNI) Brussels
(MNI) Brussels

Collateral shortages are troubling euro zone money markets going into the year-end, but the situation is not dire enough to prompt the European Central Bank into taking further action, experts told MNI.

“The collateral situation will remain tense but not tense enough that they will think of doing more,” said Francesco Papadia, former director general of market operations at the European Central Bank and now senior resident fellow at the Bruegel think tank in Brussels.

“They will say OK, find a way to survive, sorry we cannot help you more,” he adds.

Papadia reckons general collateral rates would have already spiked up if the year-end situation was about to become a trigger for ECB stress-easing actions, but there has been no sign that this is the case.

Others have also noted the more sanguine end to the year in the repo market than had been feared.

“Going into year-end, liquidity in the euro repo market is poor and pricing over the year is acutely dislocated; but compared to previous year-ends, this is relatively normal, and certainly not as extreme as the market was anticipating (and pricing-in) only a month ago,” International Capital Market Association Senior Director and Euro repo expert Andy Hill told MNI.

“German GC is priced at around ESTR-500bps over the three-day turn, compared to less 1,000bps only a month ago. Other core collateral markets are trading around ESTR-350bp, implying a significant relative premium for German collateral,” Hill added.

It would also seem that much year-end financing was locked-in early, Hill notes, which led to an earlier spike in costs, However, many dealers have now effectively shut up shop for the year, “which is reflected in GC and specials rates carrying an additional 30bp premium in the run up,” he said.

TLTRO BOOST

While the ECB’s move to incentivise banks to pay back early the cheap long-term repo funds that the central bank provided them with during the Covid crisis should help ease the collateral shortage, this will not be as much as one might assume from the big headline numbers.

The most recent TLTRO repayment of around EUR500bn does not directly translate into the same amount of top tier collateral, with the ECB’s programmes having drawn only limited sovereign paper as collateral, Papadia added.

Hill concurs: “I would also agree on the TLTRO unwind – the collateral coming back into the market is not the most in demand (for example, Bunds or French government bonds), so it does not help much in that respect”.

Camille de Courcel, Head of G10 rate strategy at BNP, had pointed out at the ECB's Conference on Money Markets in late October that TLTRO repayments would not trigger a sharp release in sovereign collateral.

“As TLTROs are repaid, we will see some collateral coming back into the market. But what we know is that you don't have more than EUR 200 billion of government bonds that have been placed at the ECB for collateral for all TLTROs.”

MNI Brussels Bureau | david.thomas.ext@marketnews.com
MNI Brussels Bureau | david.thomas.ext@marketnews.com

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