ECB Lending Hits Record Levels as GBP Pulls Higher

The European Central Bank’s Long Term Refinance Operation saw EUR489 billion borrowed by 523 European banks yesterday. This works out an average of EUR935 million per bank and showed the real scale of the funding and liquidity problems within the European banking sector and what they have been dealing with over the past few months. After an initial spike in risky assets the euro fell back dramatically over the course of the day losing over 1% versus the US dollar and with sterling versus the euro climbing through the 1.20 level for the first time since January of this year.

The issuance was well taken up; EUR489bn was well above the market estimate of EUR300bn and ours of EUR360bn and it is obvious that Santa Claus has come to town for the European banking sector but instead of owning a white beard and a jolly smile, the benefactor looked a lot like Mario Draghi. While this doesn’t fix the long-term structural issues in the EU it may ensure a rally for risky assets into the new year.

This is of course QE via the back door via the ECB should these banks take this new found liquidity and plough it into liquid securities such as European government debt and make a profit on the difference in interest rates.

Regardless, sterling managed to push on and hold the 1.20 level in GBPEUR after some strong borrowing numbers with PSNB coming in at £18.1bn vs £19.7bn expected. Tax receipts rose despite the faltering economy (through VAT and employment tithes) but expenditure on benefits also rose. Now this is obviously as a result of the deterioration in employment levels in the past year and this is only likely to increase as unemployment rises as the private sector seems unable to get those people back to work.

We also had the minutes from the latest Bank of England meeting published yesterday. The MPC said that there is “limited merit in changing the asset purchase fund for now” and it was therefore a unanimous vote to keep it at £275bn. No real surprise there as, much like the Federal Reserve, we expect the Bank of England is waiting to see what happens in Europe before dipping its toe back into the water.

We get two lots of GDP today; one from us and from the States. UK growth is expected to be confirmed at 0.5% for the 3rd quarter while US growth should total 2.0% on an annualised basis. These are both final readings for the 3rd quarter and therefore no revisions are expected. We also have consumer confidence from the US at 14.55 which is expected to show a slight improvement as the holidays get underway.

This is the last morning update email for the year and they will restart on January 3rd. I would like to thank all the readers in 2011 for their feedback and I look forward to providing these updates through next year as well.

Have a happy holiday season and a great new year.

Latest exchange rates at time of writing