MONEY MARKETS-ECB loans dampen impact of banking worries
Wed Sep 8, 2010 9:04am EDT
* Liquidity limits impact of renewed bank sector worries
* Interbank rates, stress indicator little changed on day
* ECB to resume exit next year, 2011 Euribor futures dip
By William James
LONDON, Sept 8 (Reuters) - Interbank euro lending rates were
little changed on Wednesday with the impact of renewed worries
over the euro zone banking sector dampened by the level of
surplus European Central Bank funding in the euro zone system.
Benchmark 3-month Euribor EURIBOR3MD= edged lower to fix
at 0.88 percent while equivalent euro Libor EUR3MFSR= inched
up by an eight of a basis point to 0.82609 percent.
Both rates have been on a slight downward path since the ECB
confirmed market expectations by extending the provision of
unlimited fixed-rate loans into 2011.
Although money markets remained under pressure, the
recently-announced extension to ECB liquidity provision kept the
banking system awash with liquidity and limited upward pressure
on interbank rates. Other gauges of money market tension showed
little sign of escalating difficulty.
"The ECB has put a backstop in place, so some of these
financial worries should dissipate over time," said Nick
Stamenkovic, strategist at RIA Capital Markets.
"Consequently I don't think we'll see a widespread return of
banking stress ... or any significant renewed pressure on Libor
rates."
The spread between euro Libor and Overnight Index Swaps was
unchanged on the day at 33 basis points. The spread is used as a
measure of counterparty risk and widens in times of heightened
stress.
Risk assets continued to suffer globally after fresh doubts
were cast on European banking stress test results on Tuesday,
and investors pushed the risk premium on Irish government bonds
aginst German debt to a euro lifetime high after Ireland moved
to extend its guarantee for short-term bank liabilities.
SEGMENTED MARKETS
Despite market concerns not escalating, there were still
signs that the interbank market was not functioning freely, with
euro zone banks rolling over all 191 billion euros of expiring
ECB loans at Tuesday's tenders.
Despite some traders reporting an improvement in lending
conditions, central bank data showed Portuguese banks' borrowing
from the ECB edged up to a record high, illustrating that some
institutions remain shut out of bank-to-bank lending.
"The same goes for the Greek banks and the Irish banks, they
need the ECB liquidity and there isn't any sign of that changing
any time soon," said Padhraic Garvey, strategist at ING.
For a Reuters BreakingViews column on euro zone money
markets click here: [ID:nLDE6870L1]
ECB Governing Council member Guy Quaden said that banking
sector troubles were not as dramatic as two years ago and that
the central bank was likely to continue its stalled exit
strategy in 2011.[ID:nLDE6870TB]
Euribor futures <0#FEI:> on 2011 contracts dipped slightly,
implying expectations of future Euribor rates had risen, but
analysts said the move was not indicative of any real fear that
ECB support would dry up.
"There isn't any market concern that the ECB is going to
take the rug from under the market and walk away -- the ECB is a
very important part of keeping liquidity flowing," Garvey said.
(Editing by Ron Askew)
Wed Sep 8, 2010 9:04am EDT
* Liquidity limits impact of renewed bank sector worries
* Interbank rates, stress indicator little changed on day
* ECB to resume exit next year, 2011 Euribor futures dip
By William James
LONDON, Sept 8 (Reuters) - Interbank euro lending rates were
little changed on Wednesday with the impact of renewed worries
over the euro zone banking sector dampened by the level of
surplus European Central Bank funding in the euro zone system.
Benchmark 3-month Euribor EURIBOR3MD= edged lower to fix
at 0.88 percent while equivalent euro Libor EUR3MFSR= inched
up by an eight of a basis point to 0.82609 percent.
Both rates have been on a slight downward path since the ECB
confirmed market expectations by extending the provision of
unlimited fixed-rate loans into 2011.
Although money markets remained under pressure, the
recently-announced extension to ECB liquidity provision kept the
banking system awash with liquidity and limited upward pressure
on interbank rates. Other gauges of money market tension showed
little sign of escalating difficulty.
"The ECB has put a backstop in place, so some of these
financial worries should dissipate over time," said Nick
Stamenkovic, strategist at RIA Capital Markets.
"Consequently I don't think we'll see a widespread return of
banking stress ... or any significant renewed pressure on Libor
rates."
The spread between euro Libor and Overnight Index Swaps was
unchanged on the day at 33 basis points. The spread is used as a
measure of counterparty risk and widens in times of heightened
stress.
Risk assets continued to suffer globally after fresh doubts
were cast on European banking stress test results on Tuesday,
and investors pushed the risk premium on Irish government bonds
aginst German debt to a euro lifetime high after Ireland moved
to extend its guarantee for short-term bank liabilities.
SEGMENTED MARKETS
Despite market concerns not escalating, there were still
signs that the interbank market was not functioning freely, with
euro zone banks rolling over all 191 billion euros of expiring
ECB loans at Tuesday's tenders.
Despite some traders reporting an improvement in lending
conditions, central bank data showed Portuguese banks' borrowing
from the ECB edged up to a record high, illustrating that some
institutions remain shut out of bank-to-bank lending.
"The same goes for the Greek banks and the Irish banks, they
need the ECB liquidity and there isn't any sign of that changing
any time soon," said Padhraic Garvey, strategist at ING.
For a Reuters BreakingViews column on euro zone money
markets click here: [ID:nLDE6870L1]
ECB Governing Council member Guy Quaden said that banking
sector troubles were not as dramatic as two years ago and that
the central bank was likely to continue its stalled exit
strategy in 2011.[ID:nLDE6870TB]
Euribor futures <0#FEI:> on 2011 contracts dipped slightly,
implying expectations of future Euribor rates had risen, but
analysts said the move was not indicative of any real fear that
ECB support would dry up.
"There isn't any market concern that the ECB is going to
take the rug from under the market and walk away -- the ECB is a
very important part of keeping liquidity flowing," Garvey said.
(Editing by Ron Askew)