10 May 2010 – ECB decides on measures to address severe tensions in financial markets

The Governing Council of the European Central Bank (ECB) decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term. The measures will not affect the stance of monetary policy.


In view of the current exceptional circumstances prevailing in the market, the Governing Council decided:

1. To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council.

This does not help with primary funding. It reads like it’s about defining acceptable collateral.

In making this decision we have taken note of the statement of the euro area governments that they “will take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures” and of the precise additional commitments taken by some euro area governments to accelerate fiscal consolidation and ensure the sustainability of their public finances.
In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected.

This insures the overnight rate target is met.

2. To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010.

3. To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.

Setting term rates.

4. To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.

Unsecured dollar loans from the Fed to the ECB to be reloaned to member banks vs eligible collateral. This is to keep dollar libor at the Fed’s target rate. It’s a very high risk strategy for the Fed.

6 Responses

  1. Warren said:

    “This does not help with primary funding.”

    Why not? Since the ECB accepts Greek debt regardless of credit rating, this has effectively turned Greece from currency user to currency issuer, hasn’t it?

    “This insures the overnight rate target is met.”

    Since apparently, the ECB wasn’t buying gov’t debt before, it was the markets setting the overnight rates, not the ECB. Because it is the ECB now, Greece should have no problem to refinance their debt, provided that the ECB sets the overnight rate low enough, no?

  2. I had thought with the last swap line the borrower held all fx risk and the US bore none. Are the terms different this time?

  3. as recently announced, the buying of national debt by the ecb is small and limited. so it offers no funding assistance.

    the ecb has always been necessarily setting over night rates, like all cb’s with non conv. currency/floating fx.

    buying any secs adds reserves, which tend to drive the interbank rate down unless the ecb offers interest bearing alternatives

    1. “buying any secs adds reserves…”

      If the ECB wasn’t buying gov’t secs, what secs were they buying to maintain the target overnight rate?

  4. Can someone tell me why its “a very high risk strategy for the Fed”?

    I cant see where the risk is. Risk of loss?
    The ECB gets USD balances at the Fed. The Fed gets Euro balances at the ECB. No?

    Even if it was a risk of loss, isn’t that still riskless to a CB that can create currency without constraint?

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