Eurozone banks increased their borrowing at the European Central Bank to the highest level in two years on Tuesday, highlighting the growing difficulty of sourcing funding from interbank markets as the region's debt crisis escalates. Spain and Italy face borrowing costs seen by many as unsustainable and, with little confidence in official efforts to build a bailout fund big enough to rescue them, vanishing trust between banks holding their debt has caused lending to dry up.
Faced with rising costs and declining availability of market funding sources, banks are becoming increasingly dependent on the ECB to meet their financing needs. Bank borrowing at the ECB's weekly offering of unlimited seven-day loans rose by 17 billion euros to 247 billion euros and could rise further as the crisis threatened to hit the currency bloc's higher-rated states like France.
The rise in demand for central bank funds was, in part, driven by the November 9 decision by clearing houses to raise the risk margin it requires to clear repo transactions on Italian bonds - making a key source of bank funding more expensive. Data published daily by Italian trading platform MTS showed the cost of raising overnight funding against Italian debt averaged 1.544 percent - nearly 30 basis points above the 1.25 percent rate charged at ECB refinancing operations.
On November 1 the overnight repo rate averaged 1.124 percent, the MTS data showed. Three-month cross currency basis swaps, which measure the cost of swapping euros into dollars, edged back from the previous session's extremes but remained within sight of the most expensive level since the 2008 financial crash.
The Libor benchmark cost of three-month dollar funding via interbank markets also rose, climbing half a basis point to 0.50028 percent - though market participants stressed that very little lending was completed at these costs. The rate has steadily risen since late July from around half its current level.
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