MercoPress. South Atlantic News Agency

European Central Bank drains 26.5 billion Euros from money markets

Jean Claude Trichet, ECB president

The European Central Bank drained 26.5 billion Euros in one-week funds from Euro-zone money markets on Tuesday, in line with its aim. The operation aims to offset purchases of government bonds by Euro zone central banks.

The ECB said 93 banks bid to deposit a total of 86 billion Euros in overnight funds at the ECB, which will pay a weighted average rate of 0.27%. The lowest bid rate was 0.26% and the highest bid rate was 1%.

The ECB this month embarked on an unprecedented program of purchasing government bonds in the secondary market to help push down borrowing costs for Greek, Spanish and Portuguese governments and lend support to a 750 billion Euro European Union rescue plan. The Euro has plunged about 14% against the US dollar this year on concern that some countries in the euro area are at risk of default.

Economists at Royal Bank of Scotland Group Plc said that the ECB will need to further boost bond purchases to avert a “complete collapse in confidence” among foreign investors who hold about 2 trillion Euros in Greek, Portuguese and Spanish debt.

“The size of outstanding debt is such that the ECB will in our view need to step up significantly its purchase program with an increasing focus on private debt paper” RBS chief European economist Jacques Cailloux in London said in a note to investors.

The private and public debt is equivalent to almost one quarter of Euro area GDP.

Cailloux said it’s “hard to argue” against the ECB bond-purchase program due to the level of Euro-area nations’ exposure to each others’ debt.

“The financial integration experienced over the past 15 years has resulted in a huge increase of financial-institution exposure to neighboring economies and in particular to the periphery,” Cailloux said. This has “resulted in countries becoming systemically important for global financial institutions despite their relatively small economic size”.