MONEY MARKETS-US funding market stays stable as MF Global exits

Tue Nov 1, 2011 2:18pm EDT

* Repo traders say market normal despite MF Global failure * Greek referendum fears threaten Euro bank loan window * US, Euro bank shares tumble, CDS and bond spreads widen

By Emily Flitter

NEW YORK Nov 1 (Reuters) - Investors fleeing renewed troubles in Europe had one source of comfort: Short-term markets, chiefly the U.S. repo market, remained calm as one of the biggest repo traders, MF Global, collapsed this week.

MF Global's repo operation was large. The securities firm's failure pushed repo settlement times back by several hours on Friday and Monday. But on Tuesday, things were back to normal.

Two repo traders at major dealers said the effects of MF Global's bankruptcy were not being felt in the repo space, with no uptick in the number of failures to deliver on trades.

That's in sharp contrast to the events that unfolded in 2008 following the collapse of Lehman Brothers, also a major repo player. Lehman's collapse led to huge disruptions in the repo market.

"The way the Fed has added reserves to banks over the past couple of years, we are just not at a stress level," said Thomas Simons, money market economist at Jefferies & Co. in New York.

"When Lehman Brothers went out of business, we were significantly more sensitive to it than we are now."

MF Global filed for Chapter 11 bankruptcy on Monday after failing to find a buyer. Bets that CEO Jon Corzine made on euro-zone sovereign debt triggered a plunge in the company's stock last week, and caused agencies to cut MF Global's credit ratings to junk.

GREEK SHOCK

In Europe, the brief financing opportunity that banks enjoyed during recent weeks ended abruptly following the Greek prime minister's call for a referendum on the country's bailout deal raised fears of its uncontrolled default.

Greek Prime Minister George Papandreou's shocking decision on Monday to hold a referendum thrust fears over the euro zone's future back to the surface.

If Greek voters reject the unpopular bailout plan, it could result in a hard default, which could force banks to take even deeper losses on their Greek sovereign bonds than the 50 percent agreed last week.

"The financing window has slammed shut just as it was beginning to open," said Societe Generale credit strategist Suki Mann.

"And if the Greek uncertainty continues, then it will stay closed for the rest of the year."

Shares of French banks and other lenders exposed to Greece and other weak euro-zone countries slumped, while the Markit iTraxx Senior Financial credit default swap index widened around 30 basis points to over 250 basis points.

The subordinated equivalent was over 50 basis points wider and an 18-month senior bond issued by Spanish bank BBVA on Friday was quoted 30 basis points wider since launch, with the deterioration in sentiment likely to keep both borrowers and lenders out of the market.

Signs of the renewed stress were also visible in money markets where the spread of three-month Libor rates over equivalent maturity overnight indexed swap rates widened 7 basis points to 79 basis points, back to within a basis point of its highest levels since the 2008 financial crisis.

CENTRAL BANKS IN THE SPOTLIGHT

The Federal Reserve began its two-day policy meeting on Tuesday with officials expected to lean on a modest improvement in economic data to justify a wait-and-see policy approach.

Earlier, the Reserve Bank of Australia cut rates, prompting a rise in interest-rate futures as investors priced in more easing in the months ahead.

The RBA cut its main cash rate by 25 basis points to 4.5 percent, the first easing since early 2009.

On Thursday the European Central Bank holds its first policy meeting under new head Mario Draghi just as the Greek referendum plan takes the euro crisis to a new level.

Despite that and sluggish growth, markets were not expecting a rate cut even before data on Monday showed euro- zone inflation holding at 3.0 percent last month, way above the ECB's target of close to but below 2.0 percent.

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