ECB WATCH: Liquidity, Stress Tests In Focus, Rates Seen Stable

6th Jul 2010 15:07

By Nina Koeppen Of DOW JONES NEWSWIRES FRANKFURT (Dow Jones)--The focus at Thursday's European Central Bank policy meeting will be on President Jean-Claude Trichet's news conference, where he is expected to soothe market concern over bank liquidity and ongoing tests of the soundness of banks. Trichet is expected to indicate that the ECB won't tighten monetary policy, nor limit its generous liquidity provisions over the coming months. He will probably point to a high level of general uncertainty and warn that the deleveraging of corporate balance sheets could persist for longer than expected. Many euro-zone banks are struggling to tap the market for funds. A total of 151 banks Tuesday rushed to get cash from the ECB when it allotted EUR229 billion in seven-day liquidity in its weekly tender. That is the highest amount apportioned by the ECB since it launched its special 12-month funding operations in June 2009. Economists said demand was strong after banks last week had to repay EUR442 billion in 12-month funds borrowed from the ECB. Growing concern about the sustainability of public finances and the health of the Europe's financial system have also prompted banks to park piles of cash at the ECB instead of lending it to their peers. Market interest rates have been moving higher, too. The three-month Euro Interbank Offered Rate, or Euribor, the rate at which term deposits between banks in the monetary union are offered, rose to 0.797% Tuesday from 0.793% Monday. That is the highest level since Sept. 9, 2009. Rising funding costs are a concern for banks and economists alike. That is why Trichet on Thursday will probably stress that the current level of excess liquidity in the euro-zone banking system will be high enough to keep the benchmark overnight rate--the Euro Overnight Index Average, or Eonia--well below the ECB's main refinancing rate, economists at UniCredit said in a note to clients. Eonia fixed at 0.405% Monday. If markets are functioning normally, Eonia trades close to the ECB's main refinancing rate, which is currently at 1%. Government cutbacks throughout the euro zone in 2011 could also hurt economic growth, economists said. That, combined with a muted inflation outlook, will probably prompt the ECB to keep its main interest rate unchanged until well into 2011. Economists at HSBC in London said the ECB may wait until 2012 before hiking rates. Trichet, at Thursday's press conference, will also be quizzed on expected changes to stress tests that are designed to show how well European banks are equipped to absorb shocks. According to UniCredit, investors will only be reassured about the sector's soundness if the tests are carried out uniformly across countries and include information on exposure to sovereign debt. Trichet on Thursday will probably stress that all relevant financial institutions should carry out the tests to indicate clearly whether or not a given bank is short of capital. The Committee of European Banking Supervisors later this week will publish details of which banks are being tested and what criteria will be used for the exercise. Below are the results of the poll of expected movements in interest rates: 2010 2010 2011 2011 July 8 4Q 1Q 2Q MODE 1.00% 1.00% 1.00% 1.00% High 1.00% 1.50% 1.75% 2.25% Low 1.00% 1.00% 1.00% 1.00% ABN Amro 1.00% 1.00% 1.00% 1.25% AIB 1.00% 1.00% 1.00% 1.00% Banca Intesa 1.00% 1.00% 1.00% 1.25% Bankhaus Lampe 1.00% 1.00% 1.00% 1.00% BayernLB 1.00% 1.00% 1.25% 1.50% BBVA 1.00% 1.00% 1.00% 1.00% BHF-Bank 1.00% 1.00% 1.00% 1.25% BoA-ML 1.00% 1.00% 1.00% 1.00% Bank of Ireland 1.00% 1.00% ---- ---- BremerLB 1.00% 1.50% 1.75% 2.25% CECA 1.00% 1.00% 1.25% ---- Citigroup 1.00% 1.00% 1.00% 1.25% Commerzbank 1.00% 1.00% 1.00% 1.00% CSFB 1.00% 1.00% 1.00% 1.00% Danske Bank 1.00% 1.00% 1.00% 1.00% DekaBank 1.00% 1.00% 1.00% 1.00% Deutsche Bank 1.00% 1.00% ---- ---- Dexia 1.00% 1.00% 1.00% 1.00% DZ Bank 1.00% 1.00% 1.00% 1.50% Erste Bank 1.00% 1.00% 1.00% 1.25% Helaba 1.00% 1.00% 1.00% ---- HSBC Trinkaus 1.00% 1.00% 1.00% 1.00% HWWI 1.00% 1.00% 1.00% 1.00% JP Morgan 1.00% 1.00% 1.00% 1.00% KBC 1.00% 1.00% 1.00% 1.00% La Caixa 1.00% 1.00% 1.00% 1.25% LBB 1.00% 1.00% 1.00% 1.25% LBBW 1.00% 1.00% 1.00% 1.00% Natixis 1.00% 1.00% 1.00% 1.00% Nomura 1.00% 1.25% 1.50% 1.75% Nordea 1.00% 1.00% 1.00% 1.25% NordLB 1.00% 1.00% 1.00% 1.25% Postbank 1.00% 1.00% 1.00% 1.00% Rabobank 1.00% 1.00% 1.00% 1.00% RBS 1.00% 1.00% 1.00% 1.25% RZB 1.00% 1.00% 1.00% 1.00% Sarasin 1.00% 1.00% 1.00% 1.00% SEB 1.00% 1.00% 1.00% 1.25% SocGen 1.00% 1.00% 1.00% 1.00% UBS 1.00% 1.00% 1.00% 1.25% UniCredit 1.00% 1.00% 1.00% 1.00% VoeB 1.00% 1.00% 1.25% 1.50% Wermuth AM 1.00% 1.00% 1.00% 1.00% WestLB 1.00% 1.00% 1.00% 1.00% (Nina Koeppen writes about the European Central Bank and European economy for Dow Jones Newswires in Frankfurt. She has worked as a financial journalist for eleven years, covering central bank policy, economics, foreign exchange, debt and equity markets. She can be reached at +49 69 29725 509 or by email: [email protected]. Matthias Goldschmidt in Frankfurt conducted the interest rate poll.) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments (END) Dow Jones Newswires July 06, 2010 10:07 ET (14:07 GMT)