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When you look into the ECB open market operations, the abyss looks back into you

2014/01/26

As a complement to my previous analysis on the EONIA rate I have decided to analyse the liquidity provided and removed by the ECB through open market operations. There I claimed:

… the EONIA heartbeat has returned. This can only be because the excess liquidity is gone, and the reason is the unwinding (prematurely, in my opinion and based on its effects on EONIA) of the LTRO. …

Here’s a chart (click to enlarge) of EONIA over the period of the 3-year Long-Term Refinancing Operations (also known as the “liquidity open bar”):

EONIA_LTRO2014

One can see an end-of-year spike at the end of 2012, and an end-of-quarter spike in March 2013. At that point, the heartbeat returns althout the end-of-quarter spikes in June and September are higher than for the other months. After September 2013, though, the monthly spikes start growing and the baseline rises.

For comparison, here’s a chart (on the same time axis) of the cumulative LTRO repayments, which became possible after a year since the respective LTROs:
LTRO2014

We see the EONIA spikes return in March 2013 after about €240bn of LTRO liquidity had been repaid, and they start in earnest in September 2013 after about €340bn had been returned. Currently, the cumulative repayment is about €450bn. Two of the largest repayments took place in December 2013, with over €20bn being returned each time. Presumably this was done to make the end-of-year books look good. But this also coincided with SMP sterilization shortfalls.

Draw your own conclusions.

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