A larger-than-expected take-up of dollars at a European Central Bank tender on Wednesday reflected eurozone banks' funding stresses but the fact banks were using the facility was seen as a positive and could smooth the market into year-end. Banks took more than $50 billion at a three-month operation, the first since the world's major central banks cut the cost of using dollar swap lines with the Federal Reserve last week to help institutions struggling with the fallout from the eurozone debt crisis.
That was well above the $10 billion median forecast in a Reuters poll of money market traders. Banks also took $1.6 billion in one-week funds. Morgan Stanley estimated the take-up was the most since December 2008 with banks able to borrow dollars for three months at 0.58 percent, compared with around 1.45 percent before the co-ordinated central bank action to lower the cost. The ECB had also lowered its initial margin requirement.
Morgan Stanley said some of the demand was probably due to year-end funding needs or reflected somewhat higher funding stress than previously thought. The three-month cross-currency basis swap, which reflects the cost of swapping euros into dollars in the market narrowed to 112 basis points after the tender from around 120 basis points earlier in the day and compared with around 160 basis points last week.
The cheaper dollar tender is just one measure to make funding easier for banks, with the ECB likely to cut interest rates - something that is fully priced by markets - and offer ultra-long euro liquidity at its meeting on Thursday. Longer-term tenders would go some way to replacing funding lost through bond markets, which have been all but closed in the second part of the year with only a handful of deals. Some 1.7 trillion euros of bank funding is due to roll over in the next three years, Morgan Stanley estimates.
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