(Bloomberg) — Spain will start lending out more than 60 billion euros ($65 billion) of its holdings on Friday to boost profits and capitalize on the recent surge in demand for cash in European money markets.
The country’s Ministry of Finance will provide funds currently held at local central banks in exchange for government securities as collateral. It currently earns an interest rate 20 basis points below the European Central Bank’s overnight rate, and aims to generate higher returns than the so-called ESTR by lending out that cash.
The move takes advantage of increased demand for cash as high-quality bonds flood the market thanks to Germany’s large bond issuance and the ECB’s pandemic-era bond sales. This ended a years-long collateral shortage that had frightened authorities and raised concerns about the health of Europe’s money markets.
“Liquidity auctions allow the Ministry of Finance to release surplus funds to the market and earn profits,” Spain’s Ministry of Finance said in written comments to Bloomberg News.
Incentives to lend out cash have been particularly pronounced in Germany since the central bank suspended interest payments on domestic government deposits in October.
Spain had 43 billion euros in cash at the end of last year, almost twice as much as Germany. This is before counting the more than 20 billion euros in new funds raised through bond sales so far this year.
“Spain is clearly the biggest fish left in the pond,” said Christoph Rieger, head of rates and credit research at Commerzbank. “At current repo levels, it certainly makes sense.”
–With assistance from Ainhoa Goyeneche.
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