Futures Outlook - An Excerpt from CRB'S Futures Market Service
ECB reassures the markets with the extension of unlimited bank lending until at least October
The European Central Bank (ECB) at its regular policy meeting on March 4 took a key step towards reassuring the markets by extending its guarantee of unlimited bank lending until at least October 12 for its main short-term refinancing operations. The ECB had previously only guaranteed unlimited lending until April. The ECB’s promise of unlimited bank lending is the most important aspect of its non-standard emergency monetary policy, which provides banks and the marketplace with the guarantee that banks will not be caught short of liquidity and possibly be forced to default on obligations.
The ECB’s decision to extend its promise of unlimited lending was clearly driven by the crisis over Greece’s budget deficit. The Greek government on March 4 was at least able to sell its bonds to the private market, which was certainly a step in the right direction. However, the global financial system continues to run scared. The talk of European sovereign debt defaults and the breakup of the euro, however remote, nevertheless has the potential to cause panic and capital flight. The ECB took the right action in trying to nip the panic at the bud and clearly state that it will fully backstop European banking system liquidity for another six months.
The ECB at its March 4 policy meeting also took actions that allow the ECB to shorten up the maturity of its lending, which will make the ECB’s job easier when it comes time to start drawing down excess liquidity. The nearby chart shows that the ECB still has about 400 billion euros of excess liquidity in the banking system and has not yet drawn down that liquidity.
The ECB’s extension of its lending guarantee until October was a key signal that the ECB will not raise rates this year. The ECB’s dovish action was bearish for the euro and potentially bearish for Bunds to the extent that market participants may become a bit more worried about the ECB’s inflation fighting resolve. However, the ECB’s action was supportive for European stocks and should help dampen risk spreads. The Greek debt problems are a reminder that there are still many problems churning below the surface that have the potential to surface and cause fresh market panic.
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