Dollar Funding Costs Drop as ECB Loans Ease Money Market Strain

The cost of dollar funding in euro money markets fell to the lowest in a month as banks snapped up cheaper loans from the European Central Bank.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 109 basis points below the euro interbank offered rate at 12:50 p.m. in London, from minus 114 basis points before the ECB said demand for its three-month dollar loans surged.

The ECB will lend $50.7 billion to 34 euro-area banks, up from $395 million in its last three-month dollar loan offering on Nov. 9. The ECB, the Federal Reserve and four other central banks cut the cost of emergency dollar loans last week by 50 basis points to thaw credit markets frozen by Europe’s sovereign debt crisis.

“The fact that banks are borrowing more from the ECB will certainly ease the pressure on money markets,” said Chris Clark, an interest-rate strategist at ICAP Plc in London. “The market had moved to price in a much bigger uptake at this tender, but even so, it appears to have been taken by surprise at the volume of bids.”

The ECB is charging 0.59 percent on its latest three-month loans, down from the 1.09 percent on its Nov. 9 offering. The rate offered on central bank dollar loans may have reduced some of the stigma banks previously associated with borrowing from the ECB, Clark said.

Before the central banks cut the dollar loan rate, a bank going to the ECB “implied that it didn’t have access to normal market channels,” Clark said. “By contrast, today the three- month tender offered very good value versus what was on offer in the market.”

Spread Shrinks

The strain on unsecured dollar funding markets have been easing amid investor optimism that policy makers are taking steps to staunch Europe’s sovereign crisis. The three-month cross-currency swap has shrunk 48 basis points since Nov. 29 when funding costs reached the highest since October 2008.

The one-year basis swap was 69 basis points under Euribor, compared with minus 73 basis points yesterday, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

The Euribor-OIS spread, a measure of banks’ reluctance to lend to one another in Europe, was little changed at 100 basis points. The measure, which is the difference between the borrowing benchmark and overnight index swaps, widened to 101 basis points on Dec. 1, the most since February 2009.

Overnight deposits at the European Central Bank fell, as banks placed 325 billion euros ($437 billion) with the Frankfurt-based ECB yesterday, down from 328 billion euros a day earlier.

Three-month Euribor, the rate banks say they pay for three- month loans in euros, was unchanged from yesterday at 1.472 percent. One-week Euribor fell to 0.895 percent from 0.896 percent yesterday.

The dollar London interbank offered rate, or Libor, for three-month dollar loans rose for a fourth day, to 0.54 from 0.538 percent yesterday. That’s the highest since July 2009.

To contact the reporter on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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