Central Bank Funding Pledge Seen as Short-Term Relief, Currency Swaps Show
Policy Makers’ Fix on Dollar Funds Leads to Cost Rise
Hannelore Foerster/Bloomberg
The ECB, seen here, and its counterparts in the U.K., Switzerland, Japan and the U.S. said yesterday they’ll provide unlimited three-month money to lenders in three tenders starting October.
The ECB, seen here, and its counterparts in the U.K., Switzerland, Japan and the U.S. said yesterday they’ll provide unlimited three-month money to lenders in three tenders starting October. Photographer: Hannelore Foerster/Bloomberg
The cost for European banks to fund in dollars rose, signaling that investors view policy makers’ offer of unlimited loans in the currency as a short-term fix that doesn’t address the euro region’s underlying problems.
“Major central banks have merely treated the symptom rather than the cause,” said Michael Derks, the chief strategist at foreign-exchange broker FxPro in London.
The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, was 85.4 basis points below the euro interbank offered rate as of 3:20 p.m. in London, from 81.9 basis points yesterday, after the European Central Bank and peers around the world made it easier to fund in the greenback.
The ECB and its counterparts in the U.K., Switzerland, Japan and the U.S. said yesterday they’ll provide unlimited three-month money to lenders in three tenders starting October. They acted after dollar funding dried up for European banks, particularly French lenders, amid concern Greece won’t be able to avoid defaulting on its debt.
The cost of one-year dollar funding also climbed, with the cross-currency basis swap for that period at 63.9 basis points under Euribor, compared with 62.1 basis points yesterday, according to data compiled by Bloomberg. The difference was 75.2 basis points on Sept. 13, when the swap was the most expensive since December 2008.
The euro weakened 0.3 percent to $1.3833, paring a weekly increase to 1.3 percent.
‘Wrong Disease’
“Policy makers are fighting the wrong disease,” said Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London. “Liquidity is not an issue, but solvency still is.”
The Euribor-OIS spread, the difference between three-month Euribor and overnight index swaps, fell to 75.6 basis points, from 76.9 yesterday, still within nine basis points of the highest level since March 2009, reached Sept. 12.
Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.535 percent from 1.531 percent yesterday. One-week Euribor gained to 1.111 percent, from 1.089 percent.
The three-month London interbank offered rate, or Libor, in dollars rose to 0.351 percent from 0.350 percent, according to the British Bankers’ Association.
Overnight Deposits
The European Central Bank said financial institutions increased overnight deposits. Banks parked 98 billion euros with the ECB yesterday, compared with 87 billion euros the day before and 197.8 billion euros on Sept. 12, the Frankfurt-based lender said in data released overnight. The ECB currently lends banks as much cash as they need in its refinancing operations at its benchmark rate of 1.5 percent.
The Markit iTraxx Financial Index of credit-default swaps insuring the senior debt of 25 lenders and insurers dropped for a fourth day, tumbling seven basis points to a two-week low of 254, heading for its biggest-ever weekly decline, according to JPMorgan Chase & Co. The index surged to a closing-price record of 314 basis points on Sept. 12.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline signals an improvement in investor perceptions of credit quality.
To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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