European money markets are seen resilient for now in the face of growing talk of a potential restructuring of Greek government debt, but short-term rates could spike if such a move appeared imminent. Yields on government bonds issued by the most indebted eurozone states have risen over the past few days after Germany acknowledged for the first time that Greece may need to restructure its debt.
But traders said there was no sign of stress in repo or money markets because investors believed such a move, although seen as likely eventually, would not happen in the short term. "On one hand markets are playing the restructuring story, Greek yields are definitely not normal and price in some form of restructuring," said Kornelius Purps, a UniCredit strategist.
Purps said that interbank lending would probably freeze immediately if concrete steps were taken towards restructuring, due to uncertainty over "who is going to be hit and by how much". Money market rates would probably spike like they did at the start of the financial crisis and Eonia rates could "even quadruple from one day to another", he said.
Some analysts said the interbank system was in a better position to cope with shocks now than it was at the start of the financial crisis. Eonia was at 1.146 percent on Thursday, up from 1.139 percent. In normal liquidity conditions, Eonia trades just above the refi rate which is currently at 1.25 percent, but Reuters calculations show excess liquidity in the money markets is currently at around 21 billion euros.