* Eonia volumes drop by a third y-o-y in November
* Traders note increased activity in longer-term rates
* But overall volumes still subdued, euro crisis weighs
By Marius Zaharia
LONDON, Dec 4 Euro zone banks have cut their
overnight lending to each other in favour of longer-term loans
but still lack the confidence to be more active in money markets
due to concerns about the bloc's debt crisis.
Since the European Central Bank cut the rate on its deposit
facility to zero in July, driving overnight Eonia rates
to just a few basis points, some banks have opted to lend for
longer periods, trying to attract higher interest rates.
That led to a drop in overnight volumes, with traders saying
the move offset the greater activity in longer-term rates.
The fact that overall lending volumes is unchanged indicates
there has been no fundamental improvement in the confidence
banks have in each other and that lenders are only taking more
risk because they want a slightly higher return on their cash.
"It's mostly moving peas on the same plate. Nobody is doing
much," a money market trader said. "The whole of Europe is not
exactly in equilibrium and that state seems to be quite stable
at the moment."
He said the ECB's massive cash injections have left many
euro zone banks with more liquidity than they need. Their
cautious stance makes them hold on to cash rather than lending
them to other banks or to businesses.
The daily average volumes in trades using the overnight
Eonia rate was about 20 billion euros in November, down by a
third from the same month of last year, according to Reuters
calculations. They have declined from 23.6 billion in October
and 26.3 billion in September.
Another trader said most of the activity is still in
maturities of less than three months, with the rest of unsecured
lending largely frozen.
Despite reassurances from policymakers that they will do
whatever necessary to save the euro zone, money markets remain
closed for many banks in the bloc's lower-rated states.
Eonia rates settled at 0.077 percent on Monday. The
benchmark three-month interbank Libor rate for euros
settled at 0.12714 percent on Tuesday.
The low money market rates are not being transferred to the
real economy. Banks are not confident of their own market access
longer term and therefore not lending to businesses.
Loans to the private sector fell by 0.7 percent in October
from a year before, the latest ECB data shows.
ECB President Mario Draghi proposed a central bank sovereign
bond buying programme named OMT, or Outright Monetary
Transactions, as a way of better transmitting the bank's
ultra-loose monetary policy to the crippled euro zone economy.
The idea behind it is to bring down indebted countries'
short-term borrowing costs and ease their debt burdens. As long
as sovereigns can stay afloat the chances of a banking sector
meltdown are reduced.
The OMT activation -- pending a request for a bailout from
one of the euro zone states, most likely Spain -- is expected to
further encourage banks to take more risks in lending markets.
But without a reduction in overall euro zone debt levels and
more reforms to fix the bloc's underlying economic problems,
banks are unlikely to suddenly start lending more to the real
economy, analysts say.
"In case of activation of the programme there might be a
slight improvement (in money market sentiment)," Barclays
Capital rate strategist Giuseppe Maraffino said. "But it will
not be a normalisation of the market. It would all still be
based on ECB support. Normal markets function on their own."