* 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 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
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
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
"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
"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.
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
"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
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
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.