* ECB borrowing down 20 bln euros, excess to remain large* Huge surplus after 3-yr operation to keep rates ultra low* Reserve requirement cut, Feb long-term tender to boost cash surplusBy William JamesLONDON, Jan 10 Euro zone banks cut their weekly borrowing from the European Central Bank by 20 billion euros on Tuesday, but the huge cash surplus providing life-support to the banking sector looks set to remain over the long term. Banks' need for short-term loans typically falls as the demand for cash to place on reserve at the ECB eases towards the end of a monthly cycle, but the decline has been accelerated by the central bank's provision of more, longer-term loans. This was reflected in falling demand for the ECB's weekly funding injection. Borrowing fell to 110.9 billion euros, down from 130.6 billion euros last week. Euro zone banks took up 489 billion euros late last month in the first of two opportunities to access the three-year loans - operations the ECB hopes will minimise the chances of them slashing lending in response to the region's debt crisis.
Despite the decline in week-to-week funding, the amount of cash in excess of what the ECB estimates banks need was set to keep rising and remain high over at least the next year. As a result overnight rates are anchored at rock-bottom levels and longer-term rates look likely to extend their falls."It's definitely suppressive. It keeps short-dated rates subdued and that's why you're seeing the (German two-year) Schatz where it is, Euribor has been falling, Eonia remains subdued and will remain that way," said Orlando Green, strategist at Credit Agricole in London.
Both Libor and Euribor - benchmark rates for unsecured lending between banks - have tumbled since the ECB cash injection in December while the overnight Eonia rate hovers at 0.372 percent, just 12 bps above the central bank's deposit rate. Three-month Euribor fell to 1.267 percent, the lowest since early April and down from 1.276 percent on Monday. Barclays Capital strategists estimate the rate could continue to fall, reaching 1 percent in the next few weeks. The equivalent Libor fixing fell to 1.20929 percent, down for the 14th consecutive session.
RISING LIQUIDITY TIDE The anticipated rise in excess liquidity, which currently stands at 422 billion euros according to Reuters data , was seen coming from two sources. Firstly, the ECB decided in December to halve the amount of cash it requires banks to keep on reserve. This means that from the beginning of the next maintenance period on Jan. 18, banks will have more available funds."The three-year (lending operation) itself amounts to 489 billion euros - thus creating excess liquidity of more than 300 billion for at least the next 12 months... regardless of the actual funding conditions in the market," said Barclays Capital rate strategist Giuseppe Maraffino in a note. Secondly, another opportunity to take out three-year loans at the ECB in February was also seen likely to attract significant demand, analysts said, underscoring the view that excess liquidity would remain high, and interbank rates low."I think the banks will take up the opportunity. At this stage it makes sense for banks to continue to get involved and then if they don't want it then after a year they can opt out," Credit Agricole's Green said.
* Collateral expansion will let banks take more ECB cash* Seven central banks approve the additional measures* BoE expands quantitative easing programmeBy Kirsten DonovanLONDON, Feb 9 An expansion of the assets eligible as collateral in the European Central Bank's financing operations clears the way for banks to grab more three-year cash at the end of the month and should further ease financing strains. The ECB approved proposals from seven national central banks, including those of Spain, Italy and Portugal, temporarily to accept additional credit claims as collateral. The new rules will apply at the ECB's second offering of three-year loans, on Feb. 29, when demand is expected to be similar to the near half trillion euros taken up at the first, in December. The operations are aimed at easing a bank funding squeeze as debt repayments fall due, with bond markets all but closed to banks on fears over exposure to the sovereign debt crisis."If you can effectively pledge the kitchen sink you could see a fairly significant take-up," said Rabobank rate strategist Richard McGuire. "But while it allows for easy access it doesn't address the heart of the problem."That, McGuire said, was not liquidity but that some banks were using the cash, either temporarily or longer-term, to buy their country's debt - the "carry trade", in which an investor borrows at a low interest rate to buy higher-yielding assets.
"That provides support to the peripheral issuers but sees those banks become more vulnerable to a possible turn in sentiment down the line," he said. Meanwhile, in an effort to prop up a fragile economic recovery, the Bank of England decided to inject another 50 billion pounds into the UK financial system through its quantitative easing asset purchase programme. Both the ECB and the BoE left their key interest rates unchanged at 1.0 and 0.5 percent respectivelyMuch of the funding from the ECB's first three-year operation has been earmarked for repaying maturing debt but some banks are putting the funds to work in the meantime.
Initial signs are that while northern European banks are, for now, channelling the money into safer places such as German government bonds, repos and the ECB's vaults, southern European banks, especially in Spain, have dived back into their own countries' sovereign issuance, supporting the euro zone peripheral bond markets. Expectations of a large take-up at the second such tender at the end of February have spiralled with market talk it could be as much as 1 trillion euros. However, many analysts take a more modest view and a Reuters poll published on Monday saw an allocation of 400 billion euros , higher than in a similar survey a week earlier. Deutsche Bank said that if take-up was close to its own 500 billion euro estimate this would greatly help sentiment in financial markets."It would still present a powerful tool for market sentiment as the new money which could be used for carry trades, providing a cushion for bank refinancing and to buy back own debt, could be almost double the December (operation)," the bank's analysts said in a recent note.
LENDING The cash is gradually helping free up money market lending, although the market remains far from functional. ICAP senior broker Kevin Pearce said there had been a "marked pick up" in trading over the last couple of weeks although much of it had been in certificates of deposit - tradeable debt instruments issued by banks bearing a set rate of interest - rather than straight cash."Although deals are still struck on a name specific basis, there are definitely signs that lending restrictions are being lifted and a wider spectrum of names being consider," he said."The next (three-year operation) should facilitate this even further, especially if take-up is towards the top end of the ranges mentioned recently."ECB President Mario Draghi said that although credit conditions tightened in the last quarter of 2011, that did not take into account three-year funds injected into the system at the end of December, the effects of which were still unfolding."The ECB seem to be willing to maintain a "wait and see" mode," said Annalisa Piazza, market economist at Newedge Strategy.
* ECB cash repayment raises concerns* 11 bln euros of LTRO money returned* Questions over collateral/counterpartiesBy Kirsten DonovanLONDON, May 11 An early repayment of 11 billion euros of low cost funding to the ECB last week may be due to a bank losing its eligibility as a counterparty or a shortage of collateral, underscoring concerns about the general health of the banking sector. The European Central Bank's weekly financial statement showed that 10.8 billion euros ($14 billion) of longer-term refinancing operations (LTROs) were repaid last week before maturity. This is unusual because banks are not permitted to repay such funds early. There are exceptions for the December and February three-year funding operations but even those officially cannot be repaid before one year has passed.
The outstanding amount on December's 489 billion euro three-year operation has fallen to 481 billion euros as of Thursday, although Commerzbank calculates that only around 6 billion euros of this was repaid this week. The rest of the money that was repaid early was borrowed at other long-term ECB operations."When pledged collateral becomes ineligible and the counterparty cannot come up with a replacement ... cash out of the open market operations has to be paid back," said Commerzbank rate strategist Benjamin Schroeder in a research note.
"A case where an institution itself loses its status as ECB counterparty is also conceivable."According to the ECB's website, the central bank's counterparty eligibility criteria include being subject to the Eurosystem's minimum reserve system and being "financially sound". If a financial institution is no longer eligible to borrow from the ECB it would have to reimburse any funds that it had borrowed.
"It does raise a concern as having 11 billion euros of LTRO money would suggest you're not a small bank," said one analyst who declined to be named. Commercial bank borrowing from the ECB has been high in countries most affected by the sovereign debt crisis for many months as many institutions have found funding markets firmly closed. After the second of the ECB's three-year financing operations, Spanish banks accounted for 27 percent of all ECB funding and Italian banks 23 percent."If the (repayment to the ECB) relates to a single bank, the sheer amount points to a larger dependency on the ECB," said Commerzbank's Schroeder.
Interbank Euribor rates have fallen below their dollar counterparts as money markets expect the European Central Bank to play catch up with the near-zero rate policy of the U.S. Federal Reserve. Money markets are increasingly pricing in the possibility that the ECB will cut refi rates again in the second half of this year and/or reduce the deposit facility rate which would take it to negative territory. While only seven in a Reuters poll expect the central bank will cut the refi rate by 25 basis points for a second month in a row in August, the survey showed a clear majority - 44 out of 69 - expect it will do so before 2013. An interest and deposit rate cut earlier in July, along with expectations of more to come, drove three-year Euribor rates to new record lows this week and below U.S. interbank lending rates last for the first time since 2008 recently. But analysts said the move was more a reflection of rate expectations than any indication that the escalation in the euro zone debt market was seeping through into money markets."In January 2008, it was tensions in the U.S. dollar market that pushed three-month Libor up. This explains why in that period, the dollar Libor was much higher than Euribor," Giuseppe Maraffino, strategist at Barclays said.
"Now the fact Euribor is lower than dollar Libor reflects different monetary policy expectation between Europe and the U.S. (rather than rising tensions in Europe)."Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.427 percent from 0.435 percent. That was below the U.S. dollar Libor rate which last stood at 0.448 percent. Maraffino said the market was pricing in some chance of a rate cut in the fourth quarter of the year, while in the United States the debate is now more about whether or not the Fed would do another round of quantitative easing. Fed Chairman Ben Bernanke last week offered a gloomy view of the economy's prospects, but provided few concrete clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus.
"U.S. rates are already close to zero, so the Fed is not expected to cut the Fed fund rates further, whereas in the euro zone, markets are pricing in further monetary policy action by the ECB via a policy rate cut," Maraffino added. The spread between three-month Euribor rates and three-month dollar Libor rates fell below zero for the first time since 2008 on Friday and was last at -2 basis points. Given market expectations for lower interest rates in the euro zone, analysts expected that gap to fall further, as far as -10 to - 15 bps.
"You could argue that the ECB has not been as accommodative as the Fed until now. So if it's a catch-up game, then the gap can be closed but it's going to be closed on the ECB's leg, not on the Fed's leg," Matteo Regesta, strategist at BNP Paribas said. Both the ECB and the Fed will hold monetary policy meetings next week. Markets are hoping for at least some signal of further action as Spanish borrowing costs rose sharply this week in the latest escalation of the euro zone debt crisis. Two rounds of cheap ECB financing has insulated money markets somewhat from volatile debt markets by ensuring banks are awash with cash. But the liquidity has done little to solve their underlying problems and to inspire banks to lend. In a sign of that reluctance, the ECB said 11 percent of banks that took part in its latest quarterly Bank Lending Survey made it harder for companies to borrow in the second quarter, while only 1 percent eased their rules. Separate data showed the ECB saw a jump in demand for its dollar funding as a deepening crisis left an increasing number of banks reliant on central bank support."It tells you that with the escalation of the euro crisis to yet higher levels, pressure for dollar funding is increasing. European institutions are recently finding it more difficult to fund in non-euro denominated assets," Regesta said. "That's clearly a result of risk aversion."
* Markets pricing in post-2014 U.S. Fed interest rate hike* ECB seen lagging as debt crisis slows economic growth* Eurodollar longer-dated contracts to extend lossesBy William JamesLONDON, March 26 Markets are upping bets that the U.S. Federal Reserve will hike interest rates sooner than expected as the world's biggest economy recovers, with U.S. rates seen rising faster than those in the crisis-hit euro zone. A run of strong economic data has raised speculation that the Fed may need to look again at its commitment to keep interest rates low until the end of 2014."Obviously after the last (Federal Reserve) meeting we've had more and more market participants questioning whether the Fed will keep rates so low for so far out. That's a reasonable question," said Elwin de Groot, market economist at Rabobank. Despite some spillover from the United States, euro zone interest rate futures reflect a more cautious long-term outlook, with fears that low growth would hurt the bloc's chances of escaping its long-running debt crisis.
"Yes, there is a correlation with the U.S., but (Europe) has its inherent fundamental problems which are very much ongoing," said Simon Peck, strategist at Royal Bank of Scotland. As a result, the U.S. Eurodollar futures curve - which shows how quickly markets expect rates to rise - has been steepening to show a more aggressive Fed rate-hiking cycle. Euro zone-equivalent Euribor futures have steepened less. The interest rates implied by Eurodollar and Euribor futures reach parity around 1.5 percent in the first quarter of 2015, six month earlier than markets were anticipating just two weeks ago. U.S. rates then accelerate above the euro zone. The U.S. base rate is currently 0.25 percent, compared with 1 percent in the euro zone, meaning that for rates to converge the Fed has to hike more aggressively than the European Central Bank.
RBS strategists look for increasing divergence between euro zone and U.S. rate futures contracts dated between March 2014 and March 2015. In the event of continued strong U.S. data for April and May, Eurodollar contracts expiring between 2014 and 2016 were most likely to sell off, implying expectations of higher rates, RBS said. LONG ROAD AHEAD One driver behind this change in outlook are the different approaches of the Federal Reserve and the ECB to managing policy expectations.
While the ECB never pre-commits on rate changes and gives few hints on long-term rates, the Federal Reserve has used assurances of "low rates for longer" as an important element of its monetary policy. As a result, the Fed's commitment had heavily suppressed rate rise expectations for the next two years. But continued strong data has emboldened market participants to price in a change of heart by the Fed, and with rate expectations at rock-bottom levels the repricing could have much further to run, said Simon Smith, chief economist at FxPro."It probably is a sustainable trend... whereas there was once a 'Don't fight the Fed' view, now we've seen a decent-ish run of data so far this year markets are feeling a bit more brave," he said. Nevertheless, while the long-term view may be for higher U.S. rates, there remain many hurdles that could derail the current trend well before a rate hike becomes a reality."If you look at the U.S. economic situation, obviously it's improving now but from a longer-term perspective they still have to redress their deficit problems and that may imply a negative outlook on the economy," Rabobank's de Groot said."You could argue that once they start trimming back the deficit more durably, actually the Fed will have to be there to support that process and keep rates low."
* Euro zone banks hoard record amounts of cash* Overnight borrowing reflects dislocation* Money market tensions not seen easing muchBy Kirsten DonovanLONDON, Jan 3 The euro zone banking system starts the new year awash with record levels of liquidity but few signs that institutions are prepared to lend to each other, leaving money markets frozen. Most of the near half trillion euros of three-year funds borrowed from the European Central Bank in the last week of 2011 have made their way back to the ECB's overnight deposit account. Use of the facility was close to 450 billion euros on Monday night. But, reflecting the dislocation in short-term funding markets, at least one other bank borrowed 14.8 billion euros from the ECB's punitively priced emergency lending facility.
What happens to the excess liquidity in coming weeks will be key. But with banks facing heavy refinancing schedules this year, those looking for a revival in money markets may be disappointed."My sense is that we will see some easing of tensions, but that's a natural seasonal thing," said Simon Smith, chief economist at FxPro."But it's unlikely to be that substantial because of the bank refunding that needs to be done and the three-year money was in part intended to help with that."Benchmark three-month euro Libor rates fixed a basis point lower at 1.26857 percent, and down around 6 basis points since the injection of three-year funding.
But the spread over equivalent maturity overnight indexed swap (OIS) rates has barely budged - it stands just a couple of basis points lower at 88 basis points - and RBS said there is unlikely to be a material tightening."The reduction of tail risk for banks, where the ECB has effectively backstopped the system reduces counterparty risk to the extent a Lehman type event is a lower probability," strategist Harvinder Sian said."Until the sovereign risk is reduced (spreads) are unlikely to trend narrow - and our view remains much more cautious in that sovereign defaults are likely in 2012, starting with Greece."
Concern over banks' exposure to the sovereign debt crisis has closed money markets and longer-term financing markets. Societe Generale calculates that the roughly 200 billion euros in extra funding available to banks since the three-year tender only corresponds to an estimated financing gap for 2012 based on longer-term debt redemptions and deleveraging. Even with another three-year tender in February, that means banks are unlikely to use the cash to buy euro zone government bonds, the so-called carry trade, anticipation of which drove shorter-term Italian and Spanish bond yields sharply lower at the end of the year."Banks are torn between using cheap borrowing to boost profits and intense market and regulatory pressure towards deleveraging," SG analysts said."We continue to believe that the latter is too strong a force. The large (three-year cash) take-up should reduce the speed of asset selling, but we doubt it will lead to aggressive buying of sovereign bonds."Banks did, however, cut their take-up of one-week ECB funding by just under 15 billion euros on Tuesday , although it is quite usual to see a reduction in such borrowing as the monthly maintenance period advances.