Eurozone banks maintained high levels of one-week borrowing on Tuesday, before an opportunity to secure one-year cash from the European Central Bank at which take-up is expected to be relatively modest. With slightly more than 200 billion euros of liquidity in the eurozone banking system beyond what is required for basic operations, the ECB allotted 197.4 billion euros in one-week funds on Tuesday against a maturing amount of 201.2 billion euros.
This contrasted with what happened the last time the ECB offered 12-month money in mid-2009 - 442 billion euros were taken at the first of three such tenders - when take-up at the preceding one-week operations dropped notably. "Today's result confirms our view that borrowing at tomorrow's 12-month operation will not be impressive, at around 50 billion euros, not like the first 12-month operation in 2009," said Barclays Capital strategist Giuseppe Maraffino.
On Wednesday an additional 85 billion euros of three-month funds matures, with the banks able to roll this into new three- or 12-month operations. A Reuters poll forecasts demand of 60 billion euros at the 12-month tender, although analysts expect some of that to come out of the maturing three-month funding, leaving only a small overall increase in excess liquidity.
"In the case of huge borrowing we expect rates at the long part of the Eonia curve, at 9-12 months, to fall as that means there will be a lot of liquidity for a long period," said Barcap's Maraffino. Forecasts for the take-up at the 12-month tender vary widely, with banks such as Morgan Stanley and RBS seeing higher demand of 140-150 billion euros.
However, with 12-month Eonia at 0.70 percent, compared with a record low of 0.5 percent hit in 2010, the size of any fall would be limited. Barcap estimates there will be around 225 billion euros of demand at the two one-year operations scheduled for this year and, based on current borrowing dynamics, the bank expects 70 percent of demand to come from banks in the eurozone peripheral countries. Italian banks borrowing rose almost 20 billion euros to 104.7 billion euros in October.