Turbulence across Europe's bonds is fueling debate over the tools policymakers use to keep markets functioning during a broader financial crisis. Analysts are focusing on the European Central Bank's repo program, where banks receive cash in exchange for collateral. Although it was not designed as a crisis mechanism, it is seen as an important source of liquidity should conditions tighten further.
Use of the Main Refinancing Operations has been limited, however, because it is cheaper for banks to obtain funds in the market. While liquidity remains ample, analysts say there would be a stigma around tapping the facility, since it can be seen as a sign of distress. "I have never met a bank treasury that said stigma is not an issue," said Rohan Khanna, head of European rates strategy at Barclays Plc. Market analysts suggest the ECB should follow the Bank of England by making funding costs more attractive. Just this week, banks tapped the BOE's Short-Term Repo for a near-record £132 billion ($175 billion), more than eight times the €18 billion ($20 billion) borrowed from the equivalent one-week euro-area program.
The issue is gaining urgency as the euro area's excess reserves have fallen toward €2 trillion from a peak above €4.5 trillion four years ago. That has helped push euro-area repo rates to their highest since March 2025. RBC Capital Markets said repo rates could rise further due to heavy government bond issuance, singling out France's record funding plan for 2027. RBC pointed to an "unusually sharp move" in European repo markets at the end of last month as an "ominous signal" of tighter liquidity. Citigroup's Andrea Appeddu said demand for cash at the MRO is so far insufficient to offset falling excess liquidity.
The ECB also has the Transmission Protection Instrument, which allows it to buy bonds, but it has yet to be activated since its creation in 2022. Treasurers are concerned that the ECB publishes Eurosystem borrowing data at the national level, so a sudden rise in one country could trigger rumors about which institution is responsible. "If that one country's number goes up, then the rumor mill starts," said Khanna. The ECB and the BOE declined to comment.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing