Funding tensions require ECB action

野村国际(香港)有限公司 Guy Mandy


　　To moderate downside risks to the European financial sector, we think what the ECB decides to do with interest rates next week is less important than what it could do in terms of its own and the private sector repo market. We believe that two policies it could deliver would particularly support the functioning of money markets. Firstly, the ECB could deliver areduction in the graduated haircuts it attaches to repo collateral, in a manner that wouldlower the credit differential between eurozone sovereign bonds, and which could spur afurther rally in the belly and long-end of regional curves. For the far more important privatesector repo market, the ECB should act to reduce the current shortage of high-quality repocollateral – a shortage aggravated by sequencing problems as regulatory reform of thefinancial sector is advanced – by releasing more AAA securities, possibly by creating a Fed-style TSLF programme in combination with a BoE SLS programme issuing ECB bills to highloan-to-deposit ratio institutions. However, we are not confident these changes will beimplemented next week. This is problematic since the current dynamics of the private sectorrepo market suggest that any possible downgrade of France could have a far greater impactthan commonly assumed, which argues strongly in favour of the ECB moving to stabilise thefunding markets in a more proactive manner.