Eurozone banks borrowed slightly less cash from the European Central Bank than a week ago on Tuesday, but demand for ECB liquidity is likely to remain elevated with no quick fix to the bloc's debt crisis in sight. Stress in the eurozone interbank markets has intensified over the summer on fears that banks could take a significant hit if the sovereign debt crisis sucks in countries deemed "too big to fail", such as Italy.
Many of the bloc's lenders have already met their reserve requirements with the ECB in the first part of the August 10-September 13 reserve period - a sign of increased cautiousness - but that also means their liquidity needs for the second part of the period have declined. The ECB allotted one-week cash worth 121.67 billion euros ($177 billion), compared with 133.67 maturing.
Longer-term cash tenders in particular should attract constant strong bidding from banks as traders say many in the eurozone find maturities available in both secured and unsecured lending markets getting ever shorter. Maraffino expects the ECB to allot about 45 billion euros in its three-month liquidity operation on Wednesday, roughly in line with the 48 billion euros expiring, as he says most borrowers of longer-term ECB cash are "persistent bidders".
Earlier this month the ECB reintroduced six-month funding, a crisis tactic it had previously mothballed, while it also extended limit-free funding in all its lending operations up until mid-January. There were no takers for the ECB's offering of dollar funding last Wednesday, helping ease fears about eurozone banks' access to dollar markets, after the facility was used the previous week for the first time since February.
With dollar funding markets broadly steady from last week, analysts say it is unlikely that the facility will be tapped this Wednesday unless one or more eurozone banks face specific dollar tensions. The three-month euro-dollar cross currency basis swap , which falls when dollar funding costs for eurozone banks rise, last traded at -83.25 bps, steady from last week and off August's 2-1/2 year weak point below -90 bps. Analysts say the basis swaps market was awaiting a wall of commercial paper issuance planned in September which could ease some of the funding strains.
"The chat around the basis market suggests a particularly busy September in on the cards as issuance fires back up and a real thirst for dollar funds drives European financials across the Atlantic to place debt," said ICAP analyst Chris Clark. "Such activity should, if all goes according to plan, generate bids out along the basis curve while also serving to ease pressure on the front-rolls as banks' reliance on forward FX markets to raise dollars diminishes."