Yesterday we discovered that 192 banks are using facilities from the European Central Bank. More and more of the business that used to go through the inter-bank market now goes through the Central bank of the system. Commercial banks do not trust each other enough to lend and borrow between themselves on a big enough scale for their needs. The weekly liquidity supplied by the ECB to banks rose to Euro 265 billion.
We also were told that the bond buying programme of the ECB has now bought more than Euro 200 billion of bonds, largely sovereign debt in the weaker countries. This is meant to be bought by the ECB on the basis that it mops up the equivalent of the cash it makes available for the purchases. It should avoid printing money overall to carry out the bond buying. This week there was a modest shortfall in the amount of money deposited with the ECB to cover the bond purchases in full.
The purpose of bond buying is to try to get the prices up of the weaker country bonds, thereby lowering the borrowing costs to those countries. The aim is not meant to be printing more money to buy the bonds to make more cash available, which is why they sterilize or get the money back from the bond purchases by other means from the markets.Typically banks in the system deposit with the ECB, or lend the ECB the money.
Commentators yesterday were debating whether this marks a change of policy. Is the ECB moving towards printing money to buy bonds? There is no statement to say so, no change announced on their website. It is more likely it was difficult getting in the money needed because bank liquidity was very strained.
To underwrite this possible explanation, there was a concerted move by major Central Banks together to supply more liquidity to banks and markets later in the day. This gave a sugar rush to risky markets, with shares and commodities leaping up on the news. If the market problem is just one of liquidity it is something concerted Central Bank action can resolve.
However, the deeper seated problems remain. There is a lack of competitiveness of the south of the EU. There is a problem transferring German surplus to weaker deficit countries on trade account. There is the weak position of some banks, recently recognised by more rating downgrades. There is the vicious circle between bond prices and bank balance sheets. The Euroland politicians have to do more than just enjoy the temporary benefits of more Central Bank cash.