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Thursday, December 08, 2011

Europe: ECB cuts rates, Adopts further "non-standard measures"

by Calculated Risk on 12/08/2011 10:05:00 AM

From Mario Draghi, President of the ECB: Introductory statement to the press conference

Based on its regular economic and monetary analyses, the Governing Council decided to lower the key ECB interest rates by 25 basis points, following the 25 basis point decrease on 3 November 2011. [this lowers the rate to 1.0%]
In its continued efforts to support the liquidity situation of euro area banks, and following the coordinated central bank action on 30 November 2011 to provide liquidity to the global financial system, the Governing Council today also decided to adopt further non-standard measures. These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market. They are expected to support the provision of credit to households and non-financial corporations. In this context, the Governing Council decided:

First, to conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year. The operations will be conducted as fixed rate tender procedures with full allotment. The rate in these operations will be fixed at the average rate of the main refinancing operations over the life of the respective operation. Interest will be paid when the respective operation matures. The first operation will be allotted on 21 December 2011 and will replace the 12-month LTRO announced on 6 October 2011.

Second, to increase collateral availability by reducing the rating threshold for certain asset-backed securities (ABS). In addition to the ABS that are already eligible for Eurosystem operations, ABS having a second best rating of at least “single A” in the Eurosystem harmonised credit scale at issuance, and at all times subsequently, and the underlying assets of which comprise residential mortgages and loans to small and medium-sized enterprises, will be eligible for use as collateral in Eurosystem credit operations. Moreover, national central banks will be allowed, as a temporary solution, to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorising their use. These measures will take effect as soon as the relevant legal acts have been published.

Third, to reduce the reserve ratio, which is currently 2%, to 1%. This will free up collateral and support money market activity. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions. This measure will take effect as of the maintenance period starting on 18 January 2012.

Fourth, to discontinue for the time being, as of the maintenance period starting on 14 December 2011, the fine-tuning operations carried out on the last day of each maintenance period. This is a technical measure to support money market activity.
From the Financial Times: ECB launches new support for banks

From the WSJ: Draghi Announces New ECB Crisis Moves

Also from the WSJ: EU Nearing IMF Loan Deal
The European Union is nearing a deal to lend €200 billion ($268.26 billion) to the International Monetary Fund—including €150 billion coming from the 17-nation euro zone—that the IMF could then use to shore up the troubled euro-zone sovereign debt market, euro-zone officials said Thursday.
Bond yields for Italy and Spain increased this morning. The Italian 2 year yield is up sharply to 5.98%, and the 10 year yield is up to 6.31%.

The Spanish 2 year yield is up to 4.62%, and the 10 year yield is up to 5.67%.