Excess liquidity in the eurozone has fallen to €215bn, its lowest level since end-2011.
The ECB has told us that it is “particularly attentive” to the decline in excess liquidity and the consensus has moved toward a likely delivery of another LTRO to:
1) help arrest the decline in excess liquidity as well as
2) provide some relief to SMEs especially in Spain and Italy.
At €215bn the decline in excess liquidity is not yet at a level that will set off alarm bells at the ECB. Draghi played down the significance of a decline in excess liquidity below €200bn at the ECB meeting early this month but psychologically a move below €200bn would spark off a debate as to the timing of any ECB action.
In terms of communication the ECB has been keen to explain that it is still undecided as to whether the decline in excess liquidity is due to a reduction in fragmentation or a result of unwanted deleveraging by banks.
ECB Executive Board member Praet early this week said that it remained to be seen whether 3-year LTRO repayments were due to banks shrinking their balance sheets and reducing lending to the economy.
The ECB sees this as a de facto tightening of monetary policy, and if indeed deleveraging is behind the reduction in excess liquidity, then Praet says the ECB “stands ready to take action if necessary”.
We continue to see the potential for an LTRO to be delivered in December, with:
1) a 3-5 year maturity,
2) a fixed or lower rate throughout the life of the LTRO,
3) to include ABS on SME loans, and
4) to come in conjunction with changes to the collateral framework.
With sentiment data coming in more positive, the ECB will be keen to highlight that further stimulus is packaged as providing the infant recovery with continued support.
An increase in the volume of ECB speakers on this subject will provide a more accurate guide to when an LTRO will be delivered. We decided to pay 12x24 EONIA yesterday at 0.375% seeing upside more likely as the ECB will not want to deliver the LTRO before a likely Fed tapering.