Low demand for ECB dollar swap, funding stress capped

Low demand at the ECB's first offer of long-term dollar funding since 2010 reflects the high cost of borrowing from the central bank and shows that whilst dollar funding remains scarce, most banks still have some market access. Banks borrowed $1.4 billion at the first of three dollar liquidity offerings announced last month in a bid to stave off pressure in money markets caused by a growing reluctance to lend US currency to eurozone banks.
The take-up was below the $5 billion predicted by a Reuters poll of money market traders, but in line with many analysts' view that the 1.08 percent rate and steep collateral haircuts made the ECB funding expensive relative to market rates. Six banks bid for the three-month loans and one bidder borrowed $500 million at the regular seven-day tender. In September, US money market funds' reluctance to lend to eurozone banks because of exposures to troubled Greece grabbed investors' attention, causing a spike in dollar funding costs and a sharp fall in banking shares.
Since then the cost of swapping euros into dollars - a key barometer of market stress - has eased off its most expensive levels, in part thanks to the ECB's liquidity provision. The three-month euro/dollarcross currency basis swap last stood at around -90 basis points, compared to -115 bps on September 12.
The decision to implement three-month dollar tenders along with one-year euro liquidity offerings has capped the risk that banks could face a re-occurrence of the 2008 funding drought, justifying a modest easing of prices, analysts said. But further improvement in money market conditions -with banks lending freely to each other, rather than depending on the ECB -would require greater progress on plans to re-capitalise the region's banks, and was unlikely to come in the near term.