Eurozone banks borrowed only a modest amount of dollars from the European Central Bank on Wednesday but mounting funding stresses may see that change at a three-month tender in early December. Demand for dollar funding held steady with just two banks taking around $550 million in one-week funds, despite market costs of raising dollars standing at painfully elevated levels.
By contrast, eurozone banks increased their euro borrowing from the ECB to the highest level in two years on Tuesday. US money funds reduced dollar loans to European banks by an additional 9 percent in October, Fitch Ratings said in a report on Tuesday. The funds have cut lending to Europe by 42 percent since the end of May.
However, it is still around 30 basis points cheaper for eurozone banks to borrow dollars in the market for one week than from the ECB, RBS said. However, the bank added that if financing stress intensified, there may be higher demand at a three-month dollar tender in early December.
The three-month cross currency basis swap, which measures the cost of swapping euros into dollars, is at its most expensive level since the 2008 financial crash, at around 140 basis points. Banks borrowed just $395 million in a three-month tender at the beginning of November and $1.35 billion in October. The spread of senior bank bonds in the secondary market over mid-swaps has marched relentlessly higher with those of France's BNP Paribas, for example, rising to 220 bps, compared with 130 bps in August, and Italy's UniCredit's more than doubling to 750 bps from 325 bps, according to Societe Generale. Raising new financing would probably cost an institution even more if it could access the market. Only 11 billion euros of senior paper has been issued since the beginning of July.
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