The European Central Bank failed to fully offset the extra liquidity created by its bond purchases for the first time in seven months, a sign of mounting tensions among euro-area banks.
The Frankfurt-based ECB said today that 85 banks bid a total of 194.2 billion euros ($259 billion) for seven-day term deposits. It had aimed to drain 203.5 billion euros, the amount its bond purchases have created since the program began in May last year. It last fell short of its intended total on April 26.
“It’s just another indication of how uncertain the situation is,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “At the moment, banks are holding more cash than necessary. There’s a lot of caution.”
While the ECB has failed to “sterilize” its bond program at least four times before, this is the first time it has happened since the central bank expanded the program to buy Italian and Spanish bonds in August. The ECB tries to drain the same amount from the banking system each week that its purchases have created to ensure they don’t swell the money supply and fuel inflation.
The euro fell about half a cent after the ECB’s announcement to $1.3334.
