This is worth reviewing :
FRANKFURT (MNI) – The European Central Bank Tuesday drained E129.0
billion from the banking system in a one-week liquidity-absorbing
operation intended to sterilize the ECB’s purchases of Eurozone
government bonds.
The amount drained matched the total accumlated volume of
government bonds purchased and settled by the ECB since the start of its
bond buying program in May.
One hundred banks placed bids totaling E173.57545 billion, the ECB
said. The weighted average allotment rate for today’s operation was
1.0%, the lowest rate was 0.8%, and the highest rate accepted, or the
marginal rate, was 1.05%, the ECB reported.
The drained liquidity takes the form of fixed-term deposits. These
can be used as collateral in the Eurosystem’s refinancing operations.
The central bank will hold another liquidity-absorbing operation next
week to reabsorb this week’s term deposits when they expire, as well as
any additional amounts that might be injected into the financial system
in the event of new bond purchases.
1. Previously ECB bought Spanish and Italian sovereign debt with euros
2. The sovereigns were held by the open market, various, mostly European, banks
3. After the ECB purchase these banks held euros and ECB held the sovereign bonds.
4. Then ECB sterilized by buying back euros with "fixed-term deposits" which the "100 banks" now hold.
a. the "fixed term deposits" are euro denominated agreements which can be used for collateral as long
as they're held(1 week).
b. the agreements have an average 1% yield which is paid in euros
5. Next, ECB will buy back the agreements given they only have a 1 week term, and exchange them for ?
What must ECB exchange?
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