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(UPDATE) MNI: ECB Change Risk Collateral Squeeze - DMOs


(Updates to clarify the Dutch State Treasury Agency's response regarding the ECB move)

Further cuts to remuneration on government deposits at the European Central Bank risk a return of last year’s collateral shortages, Eurosystem debt management officials told MNI, although concerns over a near-term “cliff edge” were offset by a belief that further changes will likely proceed gradually, giving markets time to adjust.

Last week the ECB set a ceiling for remuneration at the euro short-term rate (€STR) minus 20 basis points from May, saying it would allow for an orderly reduction of such deposits - with policymakers adjusting the regime “as necessary."

Any further remuneration rate reductions will affect liquidity of short-dated securities, an official at one eurozone national Treasury said. This could prompt a scarcity of collateral similar to that seen before ECB’s September announcement that it would pay government deposits at €STR, the official said, adding that there could also be implications for issuance.

Asked about the impact of the ECB's decision, the Dutch State Treasury Agency said it had measures in place to ensure the liquidity of Dutch State Loans (DSLs) and Dutch Treasury Certificates (DTCs) if required.

"We provide liquidity to primary dealers by lending DSLs and DTCs against cash on an overnight basis if these primary dealers are not able to get these securities in the market," a spokesperson said. "The DSTA serves as a lender of last resort in these circumstances."


A spokesperson for the ECB told MNI “the Governing Council will continue to monitor money market developments and the evolution of these deposit holdings, and it stands ready to make further adjustments to the remuneration regime if necessary.”

The first Treasury official was also concerned that any further decrease in remuneration could force his country to consider adjusting issuance of bonds and bills, introducing an element of unpredictability into funding plans. Other officials, though, saw no impact on issuance and stressed that the effect on collateral would be mitigated by the gradual nature of the ECB’s moves.

“In the short term, it should help avoid any tensions on collateral,” Spain’s Director General of the Treasury and Financial Policy Alvaro Lopez Barcelo told MNI, though he expressed less certainty when asked the potential effect on collateral availability of further cuts to the remuneration rate on collateral.

“In the medium term, it’s difficult to predict what effects a gradual fall in the remuneration rate will have on collateral,” Lopez Barcelo said, “because there are many other factors at play.”

Spanish issuance plans are unlikely to be affected, he said.

“As the year progresses and we have more clarity on the final funding needs, we can adjust our issuance, but we try to avoid drastic cuts to our funding needs, to maintain predictability and continue providing liquidity to the Spanish government debt market,” said Lopez Barcelo. “If some of the risks we have planned for don’t materialise, we end up with higher cash reserves.”

Spain will continue its move of recent years to reduce its bill issuance in 2023, with negative issues of EUR5 billlion of Letras del Tesoro, he said.

“We don’t think that it’s desirable to use the net issuance of Bills as a means to manage our cash reserves during the year for two reasons,” Lopez Barcelo said. “On the one hand, we have already made substantial reductions to our outstanding Bills portfolio, and if we make large cuts to our issuance of Bills, it could damage the liquidity of our short-term securities. On the other hand ... we want to be predictable and stable in our issuance pattern and provide liquidity to our Bills program throughout the year.”

The managing director of Austria’s OeBFA, Markus Stix, said it had been preparing for such a move from the ECB since September 2022,

“The announcement of the new rate at this stage increases the predictability and therefore is helpful for the market,” Stix said, “Overall, a gradual approach will reduce the likelihood of market distortions.”

The Dutch Treasury spokesperson also reported no change to issuance of cash management plans.

MNI Frankfurt Bureau | +49-69-720-146 |
MNI Frankfurt Bureau | +49-69-720-146 |

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