Recent developments in the euro money market. Money Market Contact Group Frankfurt, 18 September 2012

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1 Recent developments in the euro money market Money Market Contact Group Frankfurt, 18 September 2012

2 ECB developments and announcements I 5 July 2012 The ECB reduced by 25 basis points the interest rate on the main refinancing operations to 0.75%, on the marginal lending facility to 1.50% and on the deposit facility to 0.00%, with effect from 11 July Further to its decision of 8 December 2011 to allow the NCBs, as a temporary solution, to accept as collateral additional performing credit claims (ACC) that satisfy specific eligibility criteria, on 5 July 2012 the Governing Council approved the framework for ACC proposed by the Bank of Greece, as well as the extensions of the ACC frameworks proposed by the Central Bank of Cyprus, the Banco de Portugal and the Banca d Italia. 20 July 2012 The ECB suspended the collateral eligibility of bonds issued or guaranteed by the Greek government and will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by Greece under the second adjustment programme. 2

3 ECB developments and announcements II 26 July 2012 ECB President Draghi s speech in London on irreversibility of the euro 6 September 2012 The ECB announced modalities for the Eurosystem s outright transactions in secondary sovereign bond markets, Outright Monetary Transactions (OMTs), that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. The ECB adopted two measures to preserve collateral availability: (a) suspended the application of the minimum credit rating threshold for marketable debt instruments issued or guaranteed by the central government, and credit claims granted to or guaranteed by the central government, of countries that are eligible for OMT or are under an EU-IMF programme and comply with the attached conditionality as assessed by the Governing Council and (b) making eligible marketable debt instruments denominated in the USD, GBP and JPY, and issued and held in the euro area. 3

4 Financial market background I Strong recovery of risk sentiment with an outperformance of Italian and Spanish, on a national level, and banking shares, on a sector level 120 Equity market performance 26 July: Draghi speech 6 Sept: OMT ann S&P500 Change since 25/07 +7% 110 EuroStoxx % EuroStoxx Banks +51% 100 MIB (Italy) +31% IBEX (Spain) +33% Indexed: 1 Jan 2012 = Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Source: Bloomberg 4

5 Financial market background II Perceived credit risk of senior financials decreased in line with a decline in sovereign risk premia 400 [bps] Itraxx indices for euro area sovereigns and senior financials itraxx senior financials itraxx sovereign 6 Sept: OMT ann Dec: 3Y LTRO 23 Feb: 3Y LTRO 26 Jul: Draghi's speech 100 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Source: Bloomberg 5

6 Unsecured money market I Decline in unsecured rates across maturities EONIA lending volumes little impacted. Dekabank added to the panel. Strong investors interest in banks CD/CP in search for a positive yield EONIA rate EONIA volumes Source: ECB 6

7 Unsecured money market III STEP outstanding volumes (all maturities) Source: ECB 7

8 Unsecured money market III A continuous decline in the Euribor - OIS spreads reflecting abundant liquidity conditions, market expectations of the ECB s accommodative stance and a declining credit risk premium Current Euribor-OIS spreads 3-month forward spreads* 250 [bps] Dec: 3Y LTRO 23 Feb: 3Y LTRO 5 July: ECB rate cut Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 1m 3m 6m 12m Aug-11 Feb-12 Aug-12 * Currently corresponds to Sep12, Dec12, Mar13, Jun13 Source: Bloomberg 8

9 Market expectations of the ECB policy rates EONIA swap forward curve prices in a slight chance of a cut in the deposit facility rate by end-2012 Reuters poll (10 September): 21 out of 26 traders see no cut in the deposit facility rate this year EONIA swap forward curve 0.25 [%] Jun Sep Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Source: Bloomberg 9

10 Repo market rates Negative/zero rates in German and French repo Spanish and Italian repo rates declined but the spread to Germany broadly stable 3-month repo rates for different types of collateral 2.00 [%] Dec: 3Y LTRO 29 Feb: 3Y LTRO 5 July: ECB rate cut 0.50 IT ES 0.00 FR DE Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Source: Bloomberg 10

11 Repo market volumes A decline in core countries repo volumes due to negative/zero rates reflecting investors search for yield Little impact on short-term repo volumes (O/N GC pooling) GC pooling O/N trading volumes Source: Bloomberg 11

trading volumes Major risk factor: CCP haircut and limit actions Italian repo

12 Repo market volumes Spain and Italy Spanish repo market: stable domestic trading volumes, declining international activity Italian repo: stable trading volumes Major risk factor: CCP haircut and limit actions Italian repo market Spanish repo market (settled via Iberclear) Source: MTS Source: Banco de España 12

13 Use of the ECB s standing facilities and operations A structural shift from deposit facility into excess reserves Limited changes in the recourse to the ECB operations ECB deposit facility Maturity breakdown of the ECB s liquidity provision EUR (bln) Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: ECB 36M LTRO 12M LTRO 6M LTRO 3M LTRO 1M SLTRO MRO FTO Providing FX Swap 13

USD funding situation and ECB USD operations Further easing of USD funding conditions in the FX swap market Declining recourse to the ECB USD facilities EUR/USD FX basis swap ECB USD operations 0

14 USD funding situation and ECB USD operations Further easing of USD funding conditions in the FX swap market Declining recourse to the ECB USD facilities EUR/USD FX basis swap ECB USD operations 0 [bps] 21 Dec: 3y LTRO 29 Feb: 3Y LTRO 5 July: ECB rate cut month 6-month 1-year -175 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Source: Bloomberg Source: ECB 14

15 Signs of market segmentation I Dispersion of Euribor contributions based on the country of origin Dispersion of remuneration in retail deposits Home bias in the money market activity and collateral use Dispersion of Euribor contributions per country of origin (in bps) Source: Bloomberg, ECB calculations 15

16 Signs of market segmentation II Increasing dispersion of retail deposit rates Larger outflows in Greece No outflow in Spain if retail IOUs ( pagares ) are included 16

17 Signs of market segmentation III Persisting home bias in the market lending activity and collateral usage Share of cross-border O/N loans (TARGET2 money market transactions) Domestic and cross-border use of collateral in Eurosystem monetary policy operations Source: TARGET2 Source: ECB 17

18 Potential issues for discussion 1. MMCG assessment of the functioning of the euro money market: (a) MMCG feedback on their experience with zero and negative interest rates in the euro money market (b) Situation with regard to haircuts and limits in the government bond repo market (c) Evolution of credit limits among banks over the past three months 2. Impact of the recent announcements by the ECB (outright monetary transactions and collateral measures) on the euro money market (unsecured, secured) 18

19 Background slide: Repo market Spread Spanish yield vs. AAA basket Bloomberg 5-year AAA euro area sovereign basket (DE, FR, NL) Spain 5-year yield Dec: 3y LTRO 29 Feb: 3Y LTRO 5 July: ECB rate [%] #N/A #N/A Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug [bps] 600 Spread Spain vs. AAA basket Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Source: Bloomberg 19

Challenges to the single monetary policy and the ECB s response. Benoît Cœuré Member of the Executive Board European Central Bank

Challenges to the single monetary policy and the ECB s response Benoît Cœuré Member of the Executive Board European Central Bank Institut d études politiques, Paris 2 September 212 1 Prime conduit of monetary