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Positions in Europe: Short EUR/USD (FXE)

The ECB's Security Market Program, or secondary sovereign bond purchasing program, bought a paltry €59 Million in the week ended 2/10 versus a mere €124 Million in the week ended 2/3, and €63 Million in the week ending 1/27 to take the total program to €219.5 Billion. These diminutive figures compare to €2.243 Billion purchased in the week ended 1/17 and many weeks of low to mid single digit buying in the BILLIONS in previous months.  Frankly, we’re surprised that sovereign bond auction demand has been so strong across peripheral countries in the last three weeks -- successfully issuing paper at lower yields (versus previous auctions of similar maturity) -- without the ECB playing a critical role to fill demand.

With record levels of money being parked at the ECB’s overnight facility, much of which is a result of the 1st 36 month extension of the LTRO, we wonder just who is filling this sovereign paper demand.  Is the ECB making up the numbers?   We welcome your feedback on the issue.

European Banking Monitor: Is the ECB Making Up the Numbers? - 1. SMP

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".   If you'd like to receive the work of the Financials team or request a trial please email .

Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone.  The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4.7 bps to 70.9 bps over last Monday.

European Banking Monitor: Is the ECB Making Up the Numbers? - 1. euribor

ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.

European Banking Monitor: Is the ECB Making Up the Numbers? - 1. ECB

European Financials CDS Monitor – Bank swaps were wider in Europe last week for 26 of the 40 reference entities. The median widening was 10.1%.

European Banking Monitor: Is the ECB Making Up the Numbers? - 1. banks

Matthew Hedrick

Senior Analyst