Europe Update: ECB Deposits Hit Record High, Highlights From Merkozy Meeting
January 10, 2012
In an ongoing sign of uneasiness in Europe’s banking sector, deposits at the ECB hit another new high on Monday. Reuters reported that data showed on Tuesday that commercial banks' overnight deposits at the ECB climbed to €482B from €464B yesterday. The article also pointed out that banks are returning 70% of the money back to the ECB.
This trend is an indication that banks in Europe are continuing to avoid lending with their peers, parking any excess cash at the ECB instead.
The FT reported that ECB lending to Italian banks reached €210B at the end of December, which was the highest on record. The paper added that Italy accounted for 24.3% of total ECB liquidity at the end of December, compared with less than 10% as recently as last June.
The FT also said that French banks have been among the biggest beneficiaries of the new, looser collateral rules at the ECB. The paper noted that ECB has quietly increased the list of collateral it accepts by more than a third. According to the FT, French banks now appear to have an almost unlimited credit line at the ECB.
Team Merkozy Update:
The highlights from Monday's bilateral summit between German Chancellor Merkel and French President Sarkozy included discussions on Greece, the new treaty, new economic growth measures, a financial transaction tax, and the new EU bailout fund.
According to reports, Greece was urged to speed up its bond swap/haircut negotiations to enable the second bailout package to be activated. Without a deal, Greece will not be able to secure the next tranche of aid loans. Merkel reportedly said she wanted Greece to remain in the Eurozone and reiterated that Athens remains a special case when it comes to the private sector role in helping to reduce the debt burden.
On the topic of the new Fiscal DisciplineTreaty, Merkel said that negotiations on a new European treaty to enforce budget discipline are making rapid progress. Although differences remain, the German Chancellor said there is a good chance of reaching an agreement before the end of January. Recall that the goal is to have a new treaty signed by March 1.
Merkel and Sarkozy also called for a new push to revive economic growth and promote job creation. This is the so-called "second pillar" of the duo’s strategy to stabilize the European economy. However details were fairly light after the meeting. The two leaders called on the European Commission to establish new measures focused on job creation and labor mobility and added that there should also be measures focused on helping small- and medium-sized businesses and reducing youth unemployment.
Sarkozy also defended his push to introduce a financial transaction tax in France, even if it was not adopted by the EU or Eurozone. Merkel said that she agreed with the tax in principle, but added that she would like it to be adopted by all 27 EU countries.
Finally, reports indicate that Merkel and Sarkozy discussed accelerating the introduction of the ESM. Merkel also noted that they have been in consultation with other members to see how they could accelerate the payment of capital into the permanent bailout mechanism. This issue is also expected to be discussed at the January 23rd summit of Europe's finance ministers.
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