Massive central bank liquidity helped push the benchmark euro interbank lending rate to a fresh record low on Tuesday despite signs of stress in Greece's repo market. Analysts said there were barely any flows in the Greek repo market, underscoring a lack of confidence and highlighting the spillover of sovereign risk into the financial sector.
-- No liquidity in Greek repo market
Ballooning budget deficits, as governments spent to fuel economic activity, have raised fears that weaker fringe eurozone members like Greece may have trouble paying back their debt, casting a shadow over the whole peripheral sector. Lena Komileva, Head of G7 Market Economics at Tullett Prebon in London, said there was hardly any liquidity beyond overnight maturities in the Greek repo market. Analysts said without the European Central Bank liquidity support, the situation would get much worse and spread beyond Greece's money market. According to Tullett Prebon, the one-month Greek repo rate was quoted at 0.75 percent, 45 basis points above the equivalent German rate and well above that of Portugal at 0.35 percent.
This compared with the one-month Eurepo rate of 0.341 percent. Meanwhile, three-month euro London interbank offered rates (Libor) was fixed below 0.6 percent for the first time while the equivalent sterling rate was set slightly higher at 0.63031 percent. The dollar rate held steady at 0.25 percent.
The overnight euro Libor rate jumped to 0.61750 percent from 0.28125 percent as the market braced for the ECB to drain overnight cash later in the day, as it usually does on the final day of the reserve maintenance period. The ECB has been providing banks with unlimited funds, a move which has pushed and held the overnight Eonia rate down at around 0.3 percent, well below the central bank's benchmark rate of 1.0 percent.
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