Central Bank dollars to ease funding squeeze

Central banks' move to relieve dollar funding strains for eurozone institutions on Thursday had little immediate impact on money market pricing as longer-term liquidity in financing markets remained moribund. The European Central Bank said it would hold three separate 3-month dollar funding operations between October and December, in conjunction with the Federal Reserve and other central banks, providing funds over the crucial year-end period.
Analysts said the move should help markets. "It's very useful, we've seen for banks their funding has shortened quite significantly and this takes the pressure off," said Credit Agricole rate strategist David Keeble. Accessing dollar funding beyond all but the shortest maturities has become increasingly difficult for eurozone banks as US money market funds reduced their exposure to the region as the debt crisis intensified.
Reflecting the strains, two banks borrowed £575 million from the ECB's dollar swap line with the Federal Reserve this week, the second time the line has been used recently after a six-month break since February. With access to money markets curtailed, banks have been forced to swap euros into dollars recently, pushing cross-currency basis swaps to their widest levels since the 2008 financial crisis.
The one-year cross currency basis swap, which widens when dollar funding stress rises, narrowed around 3 basis points to -67 basis points after the ECB's announcement, but the three-month rate, was around 8 bps narrower at -89 bps after hitting three-year highs of -125 basis points earlier this week. The Markit iTraxx senior financials credit default swap index was around 15 basis points tighter at 270 basis points, and European banking shares rose around 6.7 percent.
However the moves were not as bad as the market had anticipated they could be and BNP Paribas' five-year CDS was around 40 basis points lower on the week at around 250 bps, while Societe Generale's was down around 50 bps over the same period at 370 bps.