The European Central Bank (ECB) got down to work yesterday in its first open-market operation, awarding 75 billion euros (£59 billion) in refinancing agreements in a move deemed a crucial test for the euro zone's interbank operations.
Refinancing agreements, or refis, are of limited direct importance for the real economy but are hugely important for how commercial banks manage their own funds.
"The task of the ECB is to find out what the liquidity demand of the euro area banking system is and to supply that liquidity at a level that keeps money market rates steady near 3 per cent," said Goldman Sachs economist Mr Thomas Mayer.
In normal times, the regular weekly award will be a key indicator of how the ECB judges the liquidity situation in the commercial interbank market. But these are hardly normal times, given that many market participants are still getting used to the practice. "At this stage, it is a trial and error process," Mr Mayer said.
The ECB awarded 75 billion euros in 13-day refis at a fixed rate of 3 per cent. Just how much the ECB added or drained was difficult to calculate given the lack of comparable data on expiring money market arrangements in the 11 countries participating in the euro project.
Following the award, the ECB said it had calculated that about 75 billion euros in monetary allocations from the 11 euro zone central banks were expiring on January 7th, the settlement date for yesterday's allocation.
The bank also said that the allotment was of a size intended to offset banks' reserve deficits, referring to the funds banks are required to hold at relatively low interest rates with the ECB under its minimum reserve requirement regulation.
The ECB also said that its allocation decision took account of uncertainties in phasing in the new system.
European money market participants reacted to the award with a mixture of nonchalance and disappointment. "Basically, nobody has the feeling that it was sufficient," said one Frankfurt money market dealer.
Prices for overnight funds in many euro-zone countries did not react to the award, market participants said, remaining at or just below 3.25 per cent, the ceiling for overnight funds set by the ECB's marginal lending rate.
"I didn't notice any special reaction in prices despite the difference between bids and the allotment," said one money market dealer at a foreign bank in Madrid. A trader at one of the main money market brokers in Paris said participants were quiet and wary. "From my point of view, the liquidity is fine but then again it's not very active. People don't know exactly where they're going with the new system," he said.
