FRANKFURT (Reuters) - Banks took more than $50 billion from the European Central Bank on Wednesday in its first offering since slashing the cost of borrowing dollars, a sign that some euro zone banks have problems finding dollar funding as the region’s debt crisis intensifies.
Top central banks last week acted to ensure banks outside the United States have easier access to dollars, which banks in Europe have more difficulty obtaining in the market as investor concerns about their exposure to the debt crisis have grown.
The ECB said banks asked for $50.7 billion in 84-day dollar funds and $1.602 billion in the 1-week tender in the operations, in which they are guaranteed to get all funds they requested. The demand was well above the $10 billion median forecast in a Reuters poll of money market traders.
Traders attributed banking strains in countries mired in the debt crisis as the main reason for the high amount allocated.
“The demand had two reasons: The need for dollar funding, especially in Portugal, Spain etc. and the rest just for arbitrage purposes,” a euro zone money market said.
With the cost of dollar funding slashed, the tender was also much more attractive to banks and the costs for 3-month funds were close to those available in the market.
Three-month dollar Libor rates — a measure of what banks in Europe are charging each other for dollar loans — have risen to 0.53775 percent, levels not seen since mid-2010, when Europe’s debt debacle flared up. Policymakers hope their action lowers those lending costs.
Central banks around the world last week announced steps to prevent a credit crunch among banks in Europe that are struggling with the region’s debt crisis.
The interest rate charged on the tenders was reduced, with the fixed rate charged at the 3-month tender of 0.59 percent and 0.58 percent in the 7-day tender, making them much more attractive to banks.
Analysts said that while the dollar operations were welcome, their impact in permanently easing strains should not be overestimated.
“What really matters is what the ECB does tomorrow afternoon, and in that especially what they do with the long-term refinancing operations (LTROs) and on the collateral rules,” Societe General economist Michala Marcussen said.
“What would be extremely helpful right now is if we get longer maturity LTROs.”
The ECB is expected to announce ultra-long 2-year or even 3-year refinancing operations after its meeting on Thursday.
The Fed set up dollar swaps with the ECB and the Swiss National Bank in December 2007. The facilities are unlimited.
The total use of the lines peaked at more than $580 billion in December 2008. Demand for Fed dollar swaps was high right after their reintroduction in May 2010, with $9.2 billion scooped up on May 12, all through the ECB. However, since early June of last year demand has been muted.
In the two 3-month dollar operations conducted so far this year, in October and November, banks took $1.353 billion and $395 million, respectively. Those tenders, however, were conducted at a higher interest rate, which dampened demand.
Demand in seven day tenders had fluctuated between zero and $575 million this year before today’s operation.
In addition to lowering the interest rate on the dollar tenders, the initial margin for the 3-month operation was cut to 12 percent from 20 percent previously.
Before the financial crisis, many foreign banks and investors had depended on money markets to borrow dollars to cheaply fund their dollar-denominated longer-term investments.
After the collapse of Lehman Brothers, they found themselves scrambling for dollars to fund these obligations, driving up the dollar against local currencies and raising the specter of widespread defaults.
In the currency swaps, the U.S. Fed offers dollars to foreign central banks in exchange for their currencies. The foreign central banks then lend the dollars to banks in their domestic markets, enabling firms to access dollars at a time when normal financing channels have shut down.
Reporting by Sakari Suoninen