* Three-month eurodollar cross currency swaps turn positive
* Banks withholding cash worsen liquidity squeeze
By Emelia Sithole-Matarise
LONDON, Dec 10 European banks are paying a
higher premium to swap dollars for euros in money markets,
reflecting a squeeze on liquidity as the year-end approaches and
as banks stash cash before a European Central Bank review.
The three-month euro/dollar cross currency basis swaps
turned positive for the first time since 2008 on
Monday. The cost of swapping dollar-denominated interest
payments into euros was last at 2.75 basis points. Hitherto,
banks have paid a premium to swap euros for dollars.
Excess cash in the euro financial system has been dwindling
in recent months, pushing up short-term money market rates, as
banks repay cheap three-year loans handed out by the ECB at the
height of the debt crisis in 2011 and 2012.
Exacerbating tight conditions in money markets, banks are
also holding on to cash in anticipation of the ECB's "Asset
Quality Review", which will assess whether banks have properly
valued loans in key areas of their business.
The flip in the basis swap shows euro zone banks are now
paying the lowest cost since 2008, when the financial crisis
exploded, to swap euro payments into dollars.
Money markets are still flush with dollars with the U.S.
Federal Reserve yet to trim its monetary stimulus.
"Driving this 'euro premium' we presume are the same factors
driving euro interbank rates higher into year-end," said Chris
Turner, head of currency strategy at ING.
"Euro zone commercial banks, facing a snapshot of their
balance sheets being taken as of 31 December 2013 for the Asset
Quality Review, are continuing to de-leverage."
The grind higher in money market rates pushed the euro to a
six-week high against the dollar of $1.3795 on Tuesday.
The rise in market rates accelerated after the ECB gave no hint
last week that it would soon ease monetary policy further after
cutting its main refinancing rate in November.
After the bank kept rates on hold last Thursday, ECB
President Mario Draghi said he was satisfied with levels in the
Resurgent borrowing costs could hurt a fragile economic
recovery in the euro zone. While other ECB officials have
reiterated the ECB still has steps it can take, such as cutting
its overnight deposit rate below zero if needed, the increasing
tensions in money markets reflect some scepticism.
Many in the market say taking overnight deposit rate into
negative territory, effectively charging banks to park their
cash with the ECB, could prove counterproductive and tighten
money market conditions even more as banks seek to reduce the
excess cash they hold and seek to pass on their extra costs.
Another dose of cheap long-term loans for banks looked less
imminent too while banks were still paying back the 1 trillion
euros in financing they got at the peak of the debt crisis.
"There's some scepticism in the market as to just how many
effective monetary policy options the ECB really does have at
its disposal," said ICAP strategist Chris Clark.
"Heading into 2014, unless the ECB is willing to take rather
dramatic or inventive action, we are probably unlikely to see
any easing in money market rates."