ECB Dollar Loan Signals Euro Zone Stress
The European Central Bank has lent dollars to a eurozone bank for the first time since February in the latest sign of escalating tensions in the region’s financial system.
A single bidder borrowed $500 million for a week, the ECB disclosed on Wednesday, after taking advantage of a facility that has largely lain dormant over the past year.
No details were given but the news suggested that at least one bank was having difficulties obtaining the dollar funds it required.
On its own, the use of the facility did not point to dramatic stress levels in funding markets, analysts said.
But it added to other evidence that European banks were struggling to access some forms of financing for the first time in a couple of years.
The so-called Euribor-OIS swap, a gauge of fear in the banking sector, is at its highest since 2009, while short-term euro basis swaps, which show a strong premium for buying dollars over the single currency, are at the most negative since the collapse of Lehman Brothers.
Meanwhile, the ECB continues to see high levels of funds being parked overnight in its “deposit facility”, rather than being lent to other banks.
This week, euro zone banks have continued to deposit about 80 billion euros – lower than the 145 billion euros peaks seen last week but well above the levels seen a month ago.
“All the indicators are pointing in the same way: banks are becoming more keen to use official sources of liquidity than one month ago. Is it the crisis levels of 2008? No,” said Laurence Mutkin, rates strategist at Morgan Stanley.
Nick Matthews, European economist at Royal Bank of Scotland, said: “It is probably symptomatic of the kind of stresses and strains there are in the system.”
Acting with the US Federal Reserve, the ECB first offered US dollars to euro zone banks at the end of 2007. The program was reactivated after the collapse of Lehman Brothers in late-2008 – and again in May last year, when the euro zone debt crisis was at its most intense.
The ECB on Wednesday had offered banks as much dollar liquidity as they required but at an interest rate of 1.1 percent.
One-week US dollar Libor, which analysts said was not an exact comparison but the best available, was at 0.18 percent on Wednesday.
The $500 million drawn was significantly higher than the $70 million borrowed under the facility in February.
But the latest figure was modest compared with the up-to-$10 billion that was borrowed weekly in May 2010.