Eurozone banks locked in long-term dollar funding from the European Central Bank on Wednesday, underscoring the heavy dependence on official lending lines but shoring up refinancing needs for the near-term. Although total dollar borrowing eased slightly after year end, banks opted for the security of having longer-term funding by preferring to replace short-term maturing loans with three-month cash.
Thirty four banks borrowed a total of 25.5 billion dollars at the ECB's latest offering of three-month funding and 12 banks bid for 6.2 billion of seven-day loans. This replaced 33 billion dollars of maturing short-term loans and 1.4 billion borrowed in October. "Banks seem to be looking for longer tenors in order to face the current situation and be less exposed to refinancing risks," said Elwin de Groot, senior market economist at Rabobank.
The total amount of outstanding three-month dollar loans rose to 76.6 billion dollars after the tender from 52.4 billion. The pattern mirrors a preference to secure funding on a long-term basis seen in euro markets, where banks borrowed nearly half a trillion euros in three-year loans in December.
Although longer-term borrowing reflects the current dislocations in the market, the liquidity boost has secured banks' ability to refinance the large amount of debt repayments they face in the first quarter of the year. This has arrested the decline in confidence between banks, and while an immediate improvement was not expected, funding stability satisfies one of the necessary conditions for an improvement in interbank lending.
"We now believe that for Q1 they have covered their dollar funding. Now they have to start covering Q2 when ideally they will be able then to get a few more dollars from the market," Lloyds Bank strategist Achilleas Georgolopoulos said. December's huge injection of ECB euro loans was beginning to take hold in the market, even though a record amount of the money was deposited at the ECB's overnight facility on Tuesday. Data from Italian trading platform MTS showed overnight rates repo rates on Italian general collateral have fallen sharply, trading at 20 to 54 basis points after the tender versus 73 to 130 bps in the week before.