Eurozone money markets are flush with cash at the turn of the year after generous lubrication from the European Central Bank, avoiding the end-of-year spike in lending rates which many had feared. Market interest rates for overnight cash were trading well below the ECB's 4 percent benchmark on Monday despite the central bank draining 102 billion euros over the New Year period.
But traders said it was better to undershoot the benchmark than exceed it, which had seemed a real possibility even last week given continued nervousness among banks about the health of some of their peers.
At 1130 GMT, the bid-ask spread on overnight cash had declined to 3.30/3.50 percent, according to Reuters data, from 3.90/4.10 percent at 0900 GMT. Benchmark EONIA rates were 3.618 percent on Friday, the lowest since early October, and traders expected Monday's rate remain to below 4 percent.
"It's a big victory for the ECB if you consider that at the height of the liquidity crisis the EONIA fix at year-end was calculated between 15 and 17 percent," one eurozone trader said.
The ECB topped up liquidity supplies until January 4 last Friday with an extra 20 billion euros on top of 349 billion euros already in the market. On Monday it offered to take excess cash off banks' hands until Wednesday at a fixed 4 percent rate, replacing a similar weekend operation for 150 billion euros, but take-up was relatively low at 101.58 billion euros.
Traders said this reflected cash-hoarding around the end of year, partly to flatter year-end balance sheets pummelled by four months of financial market turmoil. "They didn't take out enough given that the overnight rate is still at 3.40 percent," another money market trader said. "But it was the right thing to do, better to have it too low than have banks scrambling for cash." As of December 30, banks had also deposited close to 2 billion euros using the ECB's regular 3 percent deposit facility, a relatively high amount.
NOT BACK TO NORMAL YET: Longer term market rates also eased further on Monday although these now no longer have an end-of-year premium built into them. The three-month Euribor rate fell to 4.684 percent from Friday's 4.690 percent, further narrowing the gap to the ECB's benchmark refinancing rate.
This had been as much as 95 basis points at its peak on December 12, before the Federal Reserve, ECB and the Swiss, Canadian and British central banks announced joint action to ease liquidity tensions. But Tullett Prebon G7 economist Lena Komileva said 3-month Euribor, an average of daily quotes offered by banks to lend money to each other, was still high by normal standards. "We have seen a sharp drop in Euribor rates and will continue to do so as ECB liquidity injections work their way through the system," she said.
"But this is still way above the ECB's target, ie money market conditions remain restrictive, markets are artificially high because of the credit crunch." Two-week Euribor fell to 4.175 percent on Monday from 4.180 percent on Friday and one-month Euribor was down to 4.288 percent from 4.294 percent on December 28. Two-month defied the trend, edging up to 4.494 percent from 4.492 percent on Friday.