ECB fails to offset bond purchases

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The European Central Bank has failed to mop up the extra liquidity it has pumped into the markets via its controversial programme of buying the bonds of distressed countries, data showed on Tuesday.

Market sources said this could stem from so-called one-off "end-of-month" effects where banks were hoarding cash for accounting purposes but some analysts suggested it could point to mounting tensions between eurozone banks.

The ECB said in a statement that 85 banks bid a total of 194.2 billion euros ($258 billion) for seven-day term deposits in a regular weekly liquidity-absorbing operation.

That fell short of the 203.5 billion euros it has spent on eurozone bonds since last year under a programme to buy up the bonds of eurozone countries that are finding it hard to drum up financing the normal way via the markets.

The ECB is worried that additional liquidity it makes available via the bond purchases could swell the amount of money in circulation and therefore fuel inflation.

It therefore tries to "sterilise" the purchases by draining the same amount from the banking system each week.

It is the first time since May that there has been such a discrepancy but the sixth time in all since the bond-buying programme was launched in May 2010, the ECB said.

Berenberg Bank senior economist Christian Schulz said it "could perhaps mean that the volumes the ECB aims to drain each week are currently getting too high for the banks."

The central bank is currently under intense pressure to do more to resolve the eurozone's debilitating debt crisis.

There have been widespread calls for it to make unlimited bond purchases, effectively becoming a lender of last resort with the firepower to protect debt-ridden eurozone members from falling victim to the bond markets.

But the ECB itself is vehemently opposed, as is Germany, which fears that allowing the central bank to print unlimited amounts of money to stave off an economic slump will have catastrophic effects on inflation.

© 2011 AFP

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