AMSTERDAM—Economic data did not rock European financial markets last week as the focus was on the first round of 36-month European Central Bank (ECB) refinancing operations.
French GDP for the third quarter disappointed a bit, coming in at 0.3 percent quarterly growth versus the 0.4 percent expected. U.K. GDP on the other hand came in slightly higher than expectations, with 0.6 percent growth versus the 0.5 percent expected quarter on quarter.
The important Ifo business sentiment indicator out of Germany also surprised a bit to the upside, rising to 107.2 this month from 106.6 in November. The consensus forecast was for a drop to 106.
The Euro Stoxx 50 benchmark equity index closed at 2,290 points, gaining 3.98 percent last week in relatively volatile trading. The euro currency gained 0.34 percent to close at $1.3056, after trading as high as $1.3201 but then giving up most of those gains later in the week.
European Refinancing Takes Center Stage
The ECB has similar ways of managing its refinancing operations as the Federal Reserve. It normally manages short-term rates—the main refinancing rate, which is similar to the federal funds rate—through so-called main refinancing operations (MRO), which have a maturity of one week. Those tender offers can be rolled many times as long as the banks have the collateral eligible for the loan, but they do carry significant interest rate risk and therefore banks cannot invest these loans in longer term assets.
This is why in times of financing distress the ECB has the flexibility to introduce longer term refinancing operations (LTRO), which last longer than the MRO. Last week the ECB tendered an unlimited amount of liquidity at a maturity of 36 months for the first time ever.
The funds, lent at the main refinancing rate of 1 percent, now can be used by banks to invest in longer term assets, such as three-year government debt, with no interest rate risk.
