The European Central Bank will start accepting cash rather than just bonds as collateral for lending out some of its huge pile of government debt, it said on Thursday, to ease stress in a key short-term funding market.
The ECB’s purchases of 1.2 trillion euros worth of government bonds, aimed at boosting the economy, have inundated the euro zone’s financial system with cash.
But they have also deprived it of high-quality government bonds, the most used collateral for repurchase agreements, which are vital to finance trading and transmitting the ECB’s stimulus to the euro zone’s struggling economy.
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The devil might be in the detail. First, only 50 billion euros out of the total 1.2 trillion euros will be available for lending against cash.
Second, the bonds will be offered at a rate of at least -70 basis points against cash, seen by some in the market as punitive.
“50 billion euros is not that big,” Peter Schaffrik, chief European macro strategist at RBC Capital Markets.
“If you look at the rate they make it available at, it’s relatively expensive and it should not really allow general collateral to become much cheaper.”
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