MARKETS:THE EUROPEAN Central Bank has said it would lend dollars to two banks in the euro zone today, a sign they are finding it difficult to borrow the US currency in markets.
The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 per cent.
This is the first time since August 17th that a lender has requested dollars from the ECB.
An ECB spokesman declined to comment on which banks are borrowing the funds. The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years.
US money-market funds “have stopped rolling over dollar loans of European banks”, said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “I wouldn’t be surprised if demand increased in the next weeks.”
US funds are cutting their holdings in European banks on concerns the institutions may face funding problems as the sovereign-debt crisis escalates.
Two French banks, Crédit Agricole and Société Générale, had their long-term credit ratings cut one level yesterday by credit ratings agency Moody’s, which indicated that it planned to evaluate the impact of tighter financing markets on French banks. BNP Paribas, the largest French bank, had its long-term rating kept on review for a possible cut.
A spokeswoman for BNP Paribas said the bank did not borrow US dollars from the ECB.
The bank’s cost of borrowing in dollars has risen over the past four weeks amid concern US funds are shutting off lending to France’s banks because of their holdings of Greek government debt.
Meanwhile, the rate banks say they pay each other for three-month dollar loans is set to rise, analysts from Barclays have forecast. The interbank rate, or Libor, will reach 0.5 per cent before the end of the year, Barclays strategist Joseph Abate wrote in a note to clients. The rate was fixed at 0.349 per cent yesterday, having risen from a low of 0.245 per cent in June.
“Of all the other interest rates out there, the rise in Libor seems to be lagging,” said Mr Abate. “Banks operate globally and a lot of European banks need dollars. Because of the increase in counterparty risk, the unwillingness to lend to a European counterparty has picked up and that is being reflected in the higher cost of Libor, the cost of raising dollars.”
Stock markets recovered yesterday but remained extremely nervous, falling late in the day on reports that the Austrian parliament had failed to ratify the expansion of the European Financial Stability Facility.
Global equities and the euro gained yesterday as optimism over tentative steps to resolve Europe’s debt crisis overcame still widespread fears that Greece will ultimately default on its debt.
The pan-European FTSEurofirst 300 index of top shares closed up 1.4 per cent at 913.22, while stocks on Wall Street gained more than 1 per cent in afternoon trade. – (Bloomberg/Reuters)