Euro rates edge lower; ECB repayment looms

LONDON (BestGrowthStock) – Benchmark euro interbank lending rates nudged lower on Friday with the abundance of liquidity in the banking system expected to remain in place even after a large repayment is due to the European Central Bank next week.

The market will get its first indication next week of how much liquidity will be in the banking system early next year, and therefore what level money market rates might be at.

Over 200 billion euros of 3- and 12-month funds expire on Thursday, with banks having the opportunity to roll the cash in to shorter-dated maturities, namely a three-month operation and a one-off 13-day tender that will cover the year-end period.

“Given that market liquidity will be very difficult (with year-end), many banks will simply roll their maturities,” said Commerzbank rate strategist Christoph Rieger.

“But more importantly will be January when the bridge tender falls due…and then there is a risk we may see more of a drain than the market is expecting.

Showing the level of reliance on ECB funding, banks in Ireland, Greece, Portugal and Spain borrowed 333 billion euros from the European Central Bank in November — about 64 percent of total borrowing — with Irish banks the biggest borrowers at 136.4 billion euros.

Earlier this month the central bank extended its provision of unlimited liquidity through the first quarter of 2011, as concerns over the ability of some of Europe’s debt laden sovereigns to fund themselves grew.

“Given the continued reliance of the periphery on ECB funding, and that at the time of allotment of the funds they are repaying it would have been mostly peripheral demand as there were limited arbitrage opportunities, the majority of these funds will be rolled-over,” said RBS rate strategist Simon Peck.

There is currently around 90 billion euros of excess liquidity — over and above what the ECB deems necessary — in the banking system, which has seen the Eonia overnight rate drop t0 0.45 percent, that compares with lows of around 0.3 percent earlier this year and recent highs around 0.85 percent.

BNP Paribas rate strategist Patrick Jacq said even a 40 billion euro fall in liquidity would have a limited near-term impact.

“Don’t expect significant upward pressures on eonias near term,” said Jacq said in a note.

“If liquidity falls more significantly, the impact will be more pronounced. There was evidence in the past that the impact on eonia is more significant when excess liquidity falls below 40 billion euros.”

RBS’ Peck said that means that market prices for Eonia fixings in the first quarter are too high at 0.77 percent in February and 0.76 percent in March.

Benchmark three-month euro Libor rates were a tenth of a basis point lower at 0.94563 percent, with equivalent dollar rates steady at 0.30375 percent.

Euro rates edge lower; ECB repayment looms