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Money markets no dollar funding crunch in sight for europes banks

* Fitch data shows U.S. lending to European banks down 2 pct* Lower demand, cheap ECB lines limit dollar funding risks* Dollar swap costs stable, no repeat of Nov. 2011 spike seenBy William JamesLONDON, May 23 U.S. money market funds remain cautious over their lending to European banks, trimming exposure by 2 percent since the end of March, Fitch ratings said on Wednesday, but the data showed no sign of another dollar funding crunch on the horizon. Despite high anxiety in the financial markets over the growing possibility that Greece may be forced to leave the euro zone, the Fitch data shows Europe's banks are still able to borrow the dollars they need from the U.S. market."(Money market fund) holdings appear to be following a 'wait and see' approach until a clearer pattern emerges," Fitch wrote in the report.

In late 2011, access to dollars froze up as U.S. lenders cut lines of credit when the euro zone debt crisis threatened to engulf the large economies of Italy and Spain. This forced euro zone banks to pay a huge premium to get hold of U.S. currency. Overall lending to European banks is still half what is was in May last year, Fitch said. In part, this can be ascribed to financial institutions cutting back on their dollar liabilities and the provision of cheap loans from the European Central Bank."We saw (last year) the risks that U.S. funding could vanish quite quickly, so on the one side we have reliance on dollar funding maybe slightly lower, and then the ECB still provides a psychological backstop with its tenders," said Commerzbank strategist Benjamin Schroeder.

In November the three-month cost of swapping euros into dollars, a key funding channel for banks and a gauge of stress, hit 167 basis points. The premium on Tuesday was 53 basis points ."Front end basis (swaps) have been remarkably stable lately. Although they have fallen back in recent weeks, this has been a mere blip compared to the kind of moves we saw in the second half of last year," said ICAP analyst Chris Clark.

CAUTION PREVAILS The November spike in dollar funding costs prompted central banks to coordinate efforts to head off a crisis by allowing banks to take out three-month dollar loans at below-market rates. Much of that cash has now been paid back, supporting the view that dollar funding concerns have eased. At the latest ECB operation on Tuesday, banks borrowed $10.3 billion, $4 billion less than the amount they had to return. While the risk of a full-blown dollar funding crunch might have been taken off the table by the access to ECB loans, the Fitch data showed U.S. funds were looking at more secure ways to lend money to Europe's banks. In April, the percentage of U.S. money market fund exposure to Europe via repurchase (repo) transactions, where an asset is used to secure the loan, hit a new high of nearly 33 percent of all exposure, Fitch said."While ECB policy actions have helped to allay short-term investor concerns, the preference for secured exposure in the form of repurchase agreements continues to indicate that (money market funds) remain cautious," the report said.

Money markets shrug off greek talks setback as cash buffer anchors rates

Jan 24 Bank-to-bank borrowing rates marched lower on Tuesday and look unlikely to deviate from their downward path as a buffer of excess liquidity kept money market strains at bay even after Greece's debt-restructuring talks hit a fresh hurdle. The Greek talks ran into a snag after euro zone finance ministers rejected an offer by the country's private creditors to write down the nominal value of their debt by 50 percent in return for new longer-term bonds paying an interest rate of 4 percent. As negotiators headed back to the drawing board to secure a deal needed to avoid a messy default by Greece, there was no deterioration in key measures of money market strains, with recent liquidity measures by central banks continuing to anchor rates."The fact that there's a lot of liquidity in the system and refinancing risk for banks has disappeared for now is what the money market is focusing on rather than on the Greek PSI (private sector involvement)," said Barclays Capital strategist Giuseppe Maraffino."In the worst case scenario for Greece, I also expect tensions in money markets in terms of confidence but the fact that banks have no problem with liquidity for the next three years is very positive for money markets."Strong demand for short-term debt from the euro zone's lower-rated countries also continued, with Spanish borrowing costs for 3- and 6-month Treasury bills falling sharply, supported by cash-flush domestic banks. EGGS IN ONE BASKET?

Despite being awash with cash after the injection of nearly half a trillion euros in 3-year loans in December, there was no easing in banks' appetite for central bank funds. Banks took up 130.3 billion euros at the ECB's weekly tender, up from 126 billion euros last week and the same level of demand as before looser ECB reserve rules kicked in last month, freeing up more bank funds. Focus is now on how much of the 44 billion euros in 3-month loans maturing on Wednesday they will roll over, with a lower uptake likely to signal that banks are sticking to very short-term funding to keep collateral free for the ECB's next injection of 3-year loans on Feb. 29."It's very unlikely that banks put all their eggs in one basket and took their entire annual need in the three years, so some will still use the short end to supplement the longer tenders," ICAP senior broker Kevin Pearce said.

Although the high dependence on ECB loans shows the dislocations still plaguing the interbank market, analysts said the ECB had averted a cash crunch for banks and bought time for policymakers to work on a solution to the sovereign debt crisis, the root of the latest banking problems. London interbank offered rates for three-month euros fixed 1.3 basis points lower at 1.09886 percent, the lowest since early March. Its spread over overnight indexed swap rates, an indicator of financial stress, was two basis points narrower at 76 bps. It has fallen almost 20 bps from a peak of 93 bps hit in December, its highest since March 2009.^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ECB bank borrowing and deposits zone bank funding strains (package of graphics)^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Equivalent Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.158 percent from 1.168 percent, also the lowest in nearly 10 months. One-week rates, most heavily influenced by excess liquidity, fell to 0.422 percent from 0.429 percent on Monday while overnight rates dropped to 0.371 percent from 0.394 percent. Offers of unsecured interbank lending out to one month were also showing signs of returning, according to ICAP's Pearce."However, the market being flooded with cash, coupled with the fact that one-month does very little for regulatory liquidity requirements, means that some banks are reluctant to show bids in this period, hoping to encourage offers in longer maturities," he said.