* Eonia contracts fall, curve flattens after ECB conference
* ECB President Draghi seen calming fears of liquidity drain
* Euro slides vs dollar as traders unwind recent steepening
By William James
LONDON, Feb 7 Longer-term money market rates
eased on Thursday after European Central Bank President Mario
Draghi sought to temper the rise in interbank borrowing costs
since banks began paying back three-year ECB loans early.
Draghi estimated that, even after the initial repayments of
the second of the ECB's LTRO crisis loans, excess liquidity
would not drop below 200 billion euros ($268 billion) - the
level at which overnight borrowing costs typically begin to
He also said the central bank would closely monitor
conditions in the money market and their impact on monetary
policy, stressing that the ECB would remain "accommodative".
That double-barrelled warning against ramping up market
rates to an extent that effectively tightens monetary conditions
prompted some interbank borrowing rates to fall.
"I would base this move mainly on their liquidity
expectations, and the signal that, if their liquidity
estimations prove wrong at some point, the ECB would fall back
on this other option of 'closely monitoring'," said Benjamin
Schroeder, strategist at Commerzbank.
One-year Eonia contracts fell 3 basis points to
0.16 percent while the two-year rate dropped 5 bps
to 0.27 percent - a flattening of the money market curve that
partially unwound the recent trend.
Since the first repayment of ECB loans came in well above
consensus last month, money market curves have steepened as
traders brought forward the timing of when surplus cash in the
system would fall low enough to push rates up.
The next major batch of repayments will come on Feb. 22 when
banks have their first opportunity to pay back some of the 529
billion euros borrowed at the ECB's second refinancing operation
in March last year.
A Reuters poll on Monday showed traders expect 123 billion
to be paid back in that tranche. That would not be
enough to take the excess liquidity pumped in by the ECB below
the 200 billion euro threshold. Reuters data shows the current
liquidity excess at 495 billion euros.
Market participants also highlighted the central bank's
increased emphasis on the appreciation of the euro, which hit a
15-month high last week spurred in large part by the rise in
short-term euro market interest rates.
But the euro fell versus the U.S. dollar during the
news conference, putting in on course for its biggest daily fall
since June, as Draghi said the exchange rate was important to
growth and price stability.
Analysts said this fall reflected the flattening in money
"Draghi struck an optimistic tone, but was maybe slightly
more concerned about the LTRO repayments and euro strength than
most had expected. Thus short rates are falling a bit and the
euro is weakening slightly," said Nordea chief analyst Anders
Svendsen in a note.