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

← Homepage

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.