* ECB liquidity moves to help bank debt repayments
* Effect on shorter-term lending may be more muted
* Moody's French banks' downgrade weighs on sentiment
By Kirsten Donovan
LONDON, Dec 9 The ECB's copious liquidity
provision to banks this week should help them meet debt
repayments next year but may have only a limited effect in
freeing up shorter-term lending and even less in supporting
peripheral sovereign bond markets.
The ECB cut its key interest rate by 25 basis points to 1
percent on Thursday, introduced three-year euro liquidity loans,
halved the reserve requirement and widened the collateral base
in an effort to ease funding strains for banks.
Morgan Stanley estimates 1.7 trillion euros of bank funding
is due to roll over in the next three years. The European
Banking Association says 650-700 billion euros of funding is due
next year, most of it in the first half.
"The original one-year financing operation (in 2009)
encouraged banks to do carry trades and buy higher-yielding
government bonds, but this time it's more about giving banks an
alternative source of long-term funding," said one analyst at an
investment bank, who declined to be named.
French President Nicolas Sarkozy said the ECB's move would
enable banks to continue buying government bonds. Sovereigns
depend particularly on domestic banks to buy bonds in the
primary market but buyers of peripheral debt in the secondary
markets have been scarce for months.
Bond markets have been all but closed to banks in the second
half of 2011, with confidence in the sector waning on fears over
exposure to the euro zone debt crisis.
ECB President Mario Draghi said the new liquidity measures
put in place this week should help bank funding profiles as a
large amount of bonds matured.
The aim of the longer loans was to keep the banking system
liquid while it was under pressure due to the crisis, Draghi
told a news conference on Thursday.
Much of the extra cash provided is likely to find its way
back to the ECB's overnight deposit facility, at least
initially, although a rise in excess liquidity may be capped by
reserve requirements dropping by around 100 billion euros in
The central bank holds its first three-year tender on Dec.
21, replacing a planned one-year operation.
ICAP senior money market broker Kevin Pearce said it may
take time for the ECB's actions to filterinto the market.
"But I expect to see some positive effects from the latest
measures in January. Knowing banks have liquidity for up to
three years will boost confidence and therefore lead to an
increase in interbank dealing, initially in the near end but
hopefully progressing to longer maturities."
Fitch Ratings also said the ECB's offer of longer-term loans
could encourage longer-term lending if enough firms sign up to
the new programme.
Benchmark three-month euro Libor rates fell 3
basis points to 1.365 percent and the spread over overnight
indexed swap rates (OIS) -- one measure of stress in the
financial system -- was around 3 bps lower at 88 bps.
But other signs of stress showed little sign of easing with
the Markit iTraxx senior financial credit default swap index
6 bps wider at around 300 bps and the subordinated
equivalent 9 bps wider at around 530 bps.
However, BNP Paribas rate strategist Patrick Jacq expects
this to change.
"The impact will be an extension of the duration of
liquidity, as well as a decline in stress on bank funding. Bank
CDS are likely to decline a lot further...hand in hand with
tighter OIS/BOR spreads.
Sentiment was not helped by rating agency Moody's
downgrading the debt of BNP Paribas, Societe Generale
, and Credit Agricole on Friday, citing
deteriorating liquidity and funding conditions.
"The ECB delivered what was already expected so we haven't
seen a great improvement in sentiment," said Societe Generale
credit strategist Suki Mann.
"It just highlights how dire the situation is that they have
to do these three-year tenders."