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Money markets ecb borrowing rises despite cash glut


LONDON Jan 17 Euro zone banks stepped up weekly borrowing from the European Central Bank on Tuesday, indicating some banks are still keen to build cash buffers in the face of sovereign debt concerns despite a surfeit of liquidity in the system. Banks' demand for short-term loans was widely expected to fall as the ECB is set to relax on Wednesday the cash buffers it requires banks to place with it and after they loaded up on cheaper longer-term funds from the central bank in December. The ECB move, which will halve the reserves ratio to 1 percent, is one of a swathe of support measures the ECB announced last month and one which it calculates will free up around 100 billion euros for banks. The banks borrowed 126.88 billion euros at the weekly tender, about 16 billion euros more than their take-up last week and above the 100 billion euros forecast by a Reuters poll. They also took up nearly 39 billion euros in 28-day funds, slightly less than the 41 billion euros maturing. This will still boost the liquidity surplus in the market - currently estimated at 424 billion euros according to Reuters calculations - by around 14 billion euros, keeping interbank rates subdued. The ECB's offer of cheaper three-year funds, the second of which is due on Feb. 29 after an injection of nearly half a trillion euros in December, was also having the unintended consequence of keeping banks hooked on the central bank funds."The ECB has made it so much more attractive to borrow from the central bank than from the market so the trend of increased reliance on its funds is not going to go away any time soon," said JP Morgan strategist Seamus Mac Gorain.

"In the February LTRO (long-term refinancing operation) banks will likely pre-fund a significant proportion of their maturing liabilities for the rest of the year on the basis that they have to assume they won't be able to fund in the market."Standard & Poor's downgrade of Italy and Spain's credit ratings to closer to non-investment grade also doused some of the optimism that had been growing in the market as it compounded their banks' ability to tap funding markets.

A survey by Fitch Rating also warned that a possible retreat from southern Europe by covered bond investors may prolong the reliance of the region's banks on central bank support."There may be unease after the S&P downgrade and going into this new regime with lower reserve ratios and so people want to play it safe and are returning to the ECB," said Commerzbank strategist Benjamin Schroeder. Both Libor and Euribor - benchmark rates for unsecured lending between banks - fell to new 9-1/2-month lows on Tuesday, maintaining their downward trek since the ECB's injection of three-year funds in December. The three-month Libor fixing fell to 1.15071 percent from 1.15786 percent while the equivalent Euribor rate fixed at 1.213 percent with both seen edging closer to the ECB's refinancing rate of 1 percent in coming weeks. The overnight rate however bucked the trend, nudging up to 0.386 percent, as it typically tends to at the end of the ECB's reserves period.

Money markets ecb cash injection to keep rates pinned


* Banks grab another half trillion euros of ECB funds* Money market rates may struggle to go much lower* Focus to return to interest rate cuts?By Kirsten Donovan and William JamesLONDON, Feb 29 A sharp increase in excess cash in the banking system following a second three-year ECB funding operation on Wednesday is set to keep money market rates pinned down but may do little to free up lending to the real economy. Banks took 530 billion euros in three-year funding on Wednesday, adding more than 300 billion euros of new liquidity into the system and pushing the ECB's balance sheet to more than 3 trillion euros. Excess liquidity is set to rise to more than 800 billion euros, which will keep money market rates very low. But they are unlikely to fall much further - the Eonia overnight rate is already trading at just 0.36 percent, only around 10 basis points above the ECB's deposit rate, which is seen as a floor."The increase in the liquidity surplus, from an already all-time high level, is unlikely to have much more of an impact," Barclays Capital analysts said."(It) will at very least keep a lid on repo rates and all short-end rates, and will actually likely continue to push some of them lower, for example Libor, as sentiment should continue to be positive and investors will continue to try and grab yields."

Benchmark three-month euro Libor rates fixed a basis point lower at 0.896 percent. Commerzbank strategist Benjamin Schroeder said that with rhetoric from ECB officials pointing to Wednesday's three-year operation being the last, the focus should return to the possibility of interest rate cuts. Eonia forwards are not pricing in a cut in March, but a few basis points of cuts are priced in over the next few months."The ECB is never going to pre-commit, they'll likely wait for the effects of these tenders to unfold," Schroeder said."That's what we are seeing in these Eonia forwards: rate cut speculation setting in only two months out."

What is less clear is whether the excessive cash will reach the wider economy with banks showing scant signs last month of lending on funds borrowed at the ECB's first three-year operation in December."The (financing operations) do not address the underlying solvency issues and ultimately funding stresses can quickly return," said RBS strategist Simon Peck. STRESS GAUGES EASE

What the cash grab has undoubtedly done, however, is to reduce financing risks for banks - the operations have provided funds to help institutions repay maturing debt after finding bond markets closed late last year. That financing amounts to some 750 billion euros in 2012, according to Credit Agricole, meaning some of the short-term positive effects on rates may wane as the cash is used to meet redemptions. But with those financing risks out of the way, indicators of financial system stress are expected to fall further. The spread between three-month euro Libor - the benchmark cost of borrowing on interbank markets - and the anticipated central bank rate (OIS) has narrowed to around 53 bps from over 90 in December. Forward markets point to that spread falling to around 35 bps by September as interbank rates come down. Credit Agricole strategist Orlando Green said he expected riskier assets to rise further after Wednesday's operation - sources have told Reuters the ECB wants it to be the last, which would be consistent with a fall in Euribor rates - another euro interbank rate."The general pace of decline in the three-month Euribor rate has been in a 0.4-0.8 basis point range, and there is nothing to suggest this move cannot continue at this pace," he said."As a consequence, the tightening of the Euribor-Eonia basis should continue, as an indication of diminishing banking liquidity risk."The three-month Euribor rate has fallen by more than 40 bps since the ECB's first operation on Dec. 23, reaching a 16-month low of 0.983 percent.

Money markets euribor rates to extend slide; ecb seen on hold


* Euribor rates hit 16-month low; may fall to record* ECB not expected to announce liquidity, rate moves* March Euribor futures contract prices look too low -RBSBy William JamesLONDON, March 5 Euro zone interbank rates should extend their slide towards record low levels thanks to the ECB's boost to banking sector liquidity, but Thursday's central bank meeting is not expected to add to the pace of decline. After pumping 1 trillion euros of three-year loans into banks, the European Central Bank is expected to maintain its 'wait-and-see' stance towards interest rates and future cash injections at its monthly policy meeting. Until recently, many had forecast lower ECB rates to combat a slowdown caused by the euro zone's debt crisis, but those expectations have been slashed according to a Reuters poll of economists. Nevertheless, with banks' funding problems neutralised by the long-term cash and investor appetite for riskier assets increasing, Euribor rates - a gauge of interbank funding costs - look set to drop further towards all-time lows. Three-month Euribor fixed at a fresh 16-month low of 93.4 basis points on Monday. The rate has fallen every day since Dec. 19, declining by nearly 50 bps in that period.

Euribor futures showed the rate was forecast to be 82 bps at the March contract expiry on March 19. However some say the contract's value, which rises when market expect lower rates, could rally further."We like positioning for upside in March (20)12 Euribor futures," RBS strategists said in a research note."There is much more cash in the system versus the aftermath of the first three-year LTRO allotment, so the pace of Euribor decline is likely to remain lofty."

Further along the Euribor curve, rates were seen falling as low as 64 bps by September - a move which would test the record low of 63.4 bps hit in late March 2010."The trend is quite dominant and there's no sign whatsoever that the trend towards lower Euribor fixings is ending any time soon," said Kornelius Purps, strategist at Unicredit in Munich. LOW ECB EXPECTATIONS

However, the ECB was not expected to add momentum to the Euribor slide by cutting rates or announcing fresh plans to boost banking liquidity."There is currently no need or pressure to come up with a cut in key interest rates and I do not expect any announcement in terms of special tenders," Purps said."We have the two (three-year ECB ) tenders out now, and markets have calmed down considerably."Analysts expected the central bank to highlight signs of a stabilising, albeit weak, economic outlook to keep rates at 1 percent. In addition the risk of higher inflation than previously expected had grown due to a spike in oil prices. JPMorgan and Royal Bank of Scotland economists have revised their forecasts to a 'no change' from the ECB on interest rates, having previously forecast a 25 basis point cut."For the money markets there isn't any strong event risk," said Simon Smith, chief economist at FxPro in London.

Money markets repo market slowdown underscores banks ecb dependence


* Repo volumes shrink as euro zone banks prefer ECB cash* ECB dependency seen remaining high over longer term* Flood of ECB liquidity caps worsening of banking stressBy William JamesLONDON, Jan 23 Shrinking volumes for secured lending in the interbank market are symptomatic of the fractured trust between euro zone banks, and underscore the view that heavy reliance on the ECB will persist in the long term, analysts say. The volume of trade in the repo market, where banks commonly use government bonds as collateral to raise funding, has fallen in recent months according to trading platform data. Interdealer broker ICAP said repo volumes through its Brokertec platform were down by around 30 percent since the middle of the fourth quarter of 2011. Average Italian repo volumes over electronic trading system MTS have also fallen in January compared to December, according to information published on MTS's website. Analysts said this reflected banks' preference to use their collateral to draw long-term money from the European Central Bank rather than sourcing cash from the market.

"The recent reduction in volume seen across euro repo markets largely reflects the migration of collateral from the open market to the vaults of the ECB, via last December's three-year (refinancing operation)," said ICAP analyst Chris Clark. The decline in repo volumes affected both ends of the credit spectrum differently, Clark said, with investors preferring to hold onto low-risk German Bunds, whereas lower-rated collateral was safer to lend out to the ECB than to the market. Trust in the region's banking system has been badly hit by the sovereign debt crisis, sapping banks' appetite to lend and prompting the ECB to flood the market with access to cheap cash to prevent a serious funding squeeze. Banks borrowed 489 billion euros in three-year loans at the longest maturity cash injection the central bank has ever held, and demand was expected to be high for a second such tender at the end of February.

Banks have the option to repay the three-year loans after 12 months, but with no end in sight to the euro zone sovereign crisis, analysts expected reliance on the central bank to remain high over the long-term."It takes a long time to restore this confidence," said BNP Paribas strategist Patrick Jacq. Bank of France data showed French financial institutions increased their long-term borrowing from the ECB by 43.6 billion euros in the last month, taking a total of 107 billion euros as of Jan. 17.

DYSFUNCTION CAPPED Although the high degree of ECB dependence pointed to a dysfunctional interbank system, analysts said that while the sovereign crisis continued, the central bank measures were key to keeping stress limited and easing creditworthiness concerns."It helps to improve the perceived credit in the European banking system ... the consensus is that this is helpful to the whole banking system," said Commerzbank strategist Benjamin Schroeder. By providing long-term funding, banks are able to pay down the substantial volume of debt falling due this year. Supporting this view, a Reuters poll of money market traders showed a majority believed these steps had improved access to funding available on the previously moribund unsecured interbank market. The Libor rate for unsecured three-month euro borrowing fell for the 23rd consecutive session, down 0.01357 percent at 1.11214 percent. Nevertheless, anecdotal evidence suggested volumes were still very low and many institutions remain frozen out of the market.

Money markets repo rates dip in fed rate cut speculation


repurchase agreements fell for a second day on Wednesday as investors mulled whether the Federal Reserve might eventually follow the European Central Bank and cut the interest it pays on excess reserves. The rate on repos secured by Treasuries was last quoted at 21 basis points, down from 27 on Monday, and the lowest since June 19. The rate has dipped amid some speculation the Fed may eventually cut the interest rate it pays on excess reserves to banks (IOER). The speculation was spurred after the ECB on July 5 cut to zero the deposit rate it pays banks for parking money with it overnight."Because of the uncertainty over IOER, if you are an asset manager and you are taking money out of other markets you are probably going to put that into overnight repo, so it is going to drive the rate lower," said Thomas Simons, money market economist with Jefferies & Co in New York. The IOER currently stands at 0.25 percent. Some investors believe the Fed might reduce the rate in order to encourage other types of lending and possibly prop up economic growth.

Fed Chairman Ben Bernanke, in testimony before the Senate Banking Committee on Tuesday and Wednesday, offered few new clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus, but repeated the Fed's pledge to act if needed. Meanwhile euro zone bank-to-bank lending rates fell to all-time lows on Wednesday, driven down by record low ECB interest rates and the decision to stop paying interest on money deposited at the central bank overnight. The ECB's overnight deposit rate of zero acts as a floor for money market rates because banks lend to rivals only if they are able to earn a better rate of interest than at the central bank.

The ECB hopes its unprecedented move, which means banks now get nothing if they park their spare cash there, will nurture a return to more significant interbank lending by forcing banks to look for more profitable options. Although some money market experts fear the cut could backfire and kill off parts of the market, the move, plus a growing belief the ECB could continue to cut rates, has had an immediate impact on bank-to-bank rates. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit an all-time low of 0.464 percent on Wednesday, down from 0.470 percent. The equivalent Libor rate, also at a record low, fell by 1 basis point to 0.34464 percent. Libor is set by a smaller panel of London-based banks.

Overnight rates bucked the trend rising to 0.119 percent from 0.114 percent. However, they remain 20 basis points below where they were before the ECB cut rates. Dollar-priced three-month bank-to-bank Euribor lending rates fixed lower at 0.919 percent, while overnight dollar rates dipped to 0.33857 percent from 0.33929 percent. Euribor rates, like counterpart Libor bank-to-bank rates , are currently under investigation after it emerged a number of banks were falsely submitting the Libor rates they pay. Banks transferred almost half a trillion euros from the ECB's deposit facility to their current accounts at the central bank when its zero deposit rate came into force last week. But with the monthly reserves cycle now in its stride and fewer options available for banks to juggle their funding, the money has now started to trickle back again. A total of 382 billion euros was parked in the ECB's deposit facility overnight. Moving in the other direction, the amounts in banks' current accounts dipped to 490.8 billion euros.

Money markets stress indicators edge higher on greece concerns


* FRA/OIS spreads, euro/dollar FX swaps widening * Markets wary of Greece, but no panic yet as ECB loans help * But impact of potential Greek euro exit unknown By Marius Zaharia LONDON, May 9 The election of mainly anti-austerity politicians in Greece has pushed some euro zone money market stress indicators higher, although there was no sense of panic as most banks have already secured the cash they need for this year. Politicians who back the reforms agreed with Greece's international lenders have failed to form a government, and the political deadlock raises the risk of a full-blown Greek default next month and, some say, a potential euro zone exit. With the exact consequences of such an unprecedented event hard to predict, some closely watched interbank stress indicators have started to tick up. The difference between forward rate agreements (FRA) and overnight index swaps (OIS) - one way to focus in on counterparty risk - has risen across the curve this week. Longer-term maturities have risen more than short-term ones. Markets saw little risk of banks facing liquidity problems in the near term, as they have borrowed a total of about 1 trillion euros in long-term loans from the European Central Bank. The two-year spread was about 37 basis points, compared with 32 at the end of April. "Speculative positions in funding markets have been increasing in the last week or so and they should continue to put widening pressure on spreads like FRA/OIS and cross currency basis," said Max Leung, a rates strategist at BofA Merrill Lynch Global Research. "The real concerns (surrounding Greece) are not on the banking sector yet. In addition, there are still plenty of measures that the ECB and the Fed have in place that are shielding the banking sector from the political uncertainty." The Markit iTraxx index of default insurance for European senior financials hit its highest since mid-January on Wednesday at 268.94 basis points. That was still 100 bps lower than the highs hit before the ECB's cash injections. CROSS CURRENCY Another widely used gauge of interbank stress, the three-month euro/dollar cross currency basis swap , hit its widest levels in two weeks at minus 52 basis points. The measure, which widens when banks find it harder to borrow dollars, has been on a steady narrowing trend since the ECB's first liquidity injection in the banking sector late last year. This week, however, it has widened by 6 basis points. "There has been a little bit of movement, but there's nothing yet to suggest significant changes are taking place," said Ian Stannard, head of European FX strategy at Morgan Stanley. Stannard said the Greek political situation and uncertainties related to a broader increase of support for growth-oriented measures rather than austerity across Europe was behind the widening. But a break to levels wider than minus 60 basis points was needed to confirm a change in the overall trend, he said. "At the moment the basis is reflecting some of the uncertainty but nothing more than that." A Greek default in itself would have limited impact on the banking sector outside Greece, analysts say. Some Greek banks may lose access to the ECB's emergency liquidity measures as a result. But other banking systems have mostly written down their Greek holdings and would still be able to tap ECB funds if needed. If it becomes more apparent that Greece is heading towards a euro exit, however, stress is likely to increase sharply, as the exact consequences on the euro zone banking system are unknown. "Another Greek default may not be a Lehman-type event, but a potential Greek exit could be," BofA Merrill Lynch's Leung said.