Demand for European Central Bank weekly funding hit its highest since mid-2009 on Tuesday, as confidence that the eurozone crisis could be solved continued to wane after another disappointing European Union summit last week. A total of 197 banks borrowed 292 billion euros for a week from the ECB, compared with 252 billion expiring, while banks took 41 billion euros in one-month loans as 55.55 billion euros was rolling off.
A decline in the take-up at the monthly tender suggests some banks may have opted for the one-week loans to save collateral for the three-year tender on December 21, the first in the central bank's history, analysts said. "People are readying collateral for the three-year (tender)," said Commerzbank rate strategist Benjamin Schroeder, adding that the results of the ECB liquidity operations pointed to strong demand at the ultra-long cash auction next week.
A Reuters poll of money market traders puts demand at 100 billion euros, although forecasts from the 18 polled ranged from 20 billion euros to 250 billion. As a result of Tuesday's tenders, excess liquidity in the euro system is expected to rise above 300 billion euros for the week ahead, which will keep euro overnight Eonia interest rates depressed in the near future.
In other signs of stress, overnight deposits rose to 346 billion euros, the highest this year. Emergency overnight borrowing stayed high at almost 9 billion euros. The three-month euro/dollar cross-currency basis swap expanded by more than 20 basis points to minus 150 bps, its widest level this month. Three-month dollar Libor inched higher.
The ESM is the planned permanent successor of the current euro zone rescue fund. While dollar interbank rates continued to grind higher, euro rates fell - the three-month euro Libor fixed at 1.35643 percent versus Monday's 1.35929 percent. The introduction of three-year liquidity tenders signalled that the ECB was ready to keep monetary policy loose for a longer period of time, some analysts said.
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