ECB Coordinates With Fed to Lend Dollars to Euro-Area BanksJeff Black
The European Central Bank said it will lend dollars to euro-area banks in a series of three-month loans as the region’s debt crisis limits market access to the U.S. currency.
The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year. The three-month loans are in addition to the bank’s regular seven-day dollar offerings and will be fixed-rate tenders with full allotment, the ECB said in a statement today. They will be offered on Oct. 12, Nov. 9 and Dec. 7.
The euro jumped more than a cent against dollar after the announcement and traded at $1.3854 at 5:14 p.m. in Frankfurt. Stocks rose and Treasuries fell, pushing 10-year yields up the most in more than three weeks.
“The market focus on this as a problem is way over the top,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This is not a Lehman event. Extending the term to three months today is a clever way to show the central bank authorities are on the case.”
Two banks this week borrowed dollars from the ECB in its seven-day operation, a sign they are finding it difficult to access the U.S. currency in markets as the debt crisis makes financial institutions more wary of lending. The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. It declined after the ECB’s announcement today.
The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 80.25 basis points below the euro interbank offered rate, or Euribor, at 4:15 p.m. in Frankfurt. It widened to as much as 112.6 basis points earlier this week, the most since Dec. 2, 2008, according to data compiled by Bloomberg.
“The ECB is seeing the stress in the dollar markets right now,” said Benjamin Schroeder, a rate strategist at Commerzbank AG in Frankfurt. “If there was really a big problem you’d see more demand in the seven-day tender. The ECB is trying to prevent things from getting out of hand.”
BNP Paribas Surges
The ECB yesterday allotted $575 million in its seven-day dollar operation, without naming the banks it lent to. French banks Societe Generale SA and BNP Paribas SA said yesterday they didn’t borrow dollars from the ECB.
BNP Paribas, France’s biggest lender, rose as much as 22 percent in Paris trading after today’s ECB announcement. BNP Paribas shares were up 5.57 euros, or 21 percent, to 32.47 euros as of 3:18 p.m.
Moody’s Investors Service yesterday cut the long-term credit ratings of Credit Agricole SA and Societe Generale, France’s second- and third-largest banks, and put BNP Paribas on review for a possible downgrade, citing the risks posed by their investments in Greece. Moody’s also said it will evaluate the impact of tighter financing markets on French banks.
While the ECB’s provision of liquidity helps to ease tensions in money markets, “the root is the debt crisis, and that will remain on the table for a long time,” said Marco Valli, chief euro-area economist at UniCredit Group in Milan. “The ECB could decide to extend refinancing operations to 12 months or resume the covered-bond purchase program.”
The ECB last introduced a three-month dollar loan in May 2010 to calm markets roiled by the threat of a Greek default.
The ECB has been lending banks as much euro cash as they need at its benchmark rate since October 2008, when the collapse of Lehman Brothers Holdings Inc. triggered a global recession. It has been forced by the debt crisis to extend those measures and last month reintroduced an unlimited six-month euro loan.
The ECB’s dollar loans tackle “one small problem in the market at the moment,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe in London. “Ultimately, until there’s a more comprehensive response to the sovereign debt crisis, which has been feeding into concerns about the health of European banks, the strains in Europe’s banking sector will continue.”
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