Recap 1-14-13: EU rates and the ECB balance sheet


It’s worth noting that EU banks have a weekly option to repay their LTRO borrowing starting on Jan 30th. If the amount repaid is high enough, the reduced liquidity could tighten the spread between the ECB policy rate and Eonia rates sharply, from ~-65bps now. But the amount that would need to be repaid before that occurs is substantial – probably on the order of 500bn. The chart below shows the spread between 3m Eonia and the ECB refinance rate vs the total amount of Euros lent via LTRO programs. (RHS, Inverted)

As the chart shows, historically, when aggregate LTRO lending has exceeded ~500bn, Eonia has traded much lower than the Refi rate as the system is full of liquidity. From current levels of over 1bn, we will probably need to see almost half of aggregate LTRO loans repaid before the spread will start to close. And that doesn’t seem likely yet. EU banks are still depositing 223bn Euros at the ECB at a rate of 0% rather than lend them out to other banks. This is well off of crisis highs but remains elevated relative to the period before that.

Having said all that, however, it is possible that market participants are looking at the Jan 30th date with a bit of trepidation. Although only 2 banks have publicly announced their intention to repay their LTRO loans, a much higher than expected repayment amount could introduce some additional volatility into the Euribor market.


  • Li & Fung was down 15% after a profit warning.
  • Apple at $501, down ~4%. nikkei said they scaled back production plans. the article said they cut its original target to order 65mm iphone 5 displays this quarter by about half in the face of weaker-than-expected demand
  • Iwata, president of the JapanCenter for Economic Research, said an equilibrium level would be around 95 yen, while Kuroda, a former vice finance minister, said the yen was “slightly overvalued.”

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