Bloomberg News

ECB Lends U.S. Dollars to Two Banks as Markets Tighten

September 14, 2011

(Removes reference to fund managers in bank report in eighth paragraph.)

Sept. 14 (Bloomberg) -- The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets.

The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time since Aug. 17 that a lender requested dollars from the ECB. The spot rate was $1.3625. An ECB spokesman declined to comment on which banks borrowed the funds.

The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 99.1 basis points below the euro interbank offered rate, or Euribor, at 12:24 p.m. in Frankfurt, indicating a premium to buy the greenback. It widened to as much as 112.6 basis points earlier this week, the most since Dec. 2, 2008, according to data compiled by Bloomberg.

U.S. money-market funds “have stopped rolling over dollar loans of European banks,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “I wouldn’t be surprised if demand increased in the next weeks.”

U.S. funds are cutting their holdings in European banks on concern the institutions may face funding problems as the sovereign-debt crisis escalates.

Credit Ratings

Credit Agricole SA and Societe Generale SA had their long- term credit ratings cut one level today by Moody’s Investors Service, which said it will now evaluate the impact of tighter financing markets on French banks. BNP Paribas SA, the largest French bank, had its long-term rating kept on review for a possible cut.

BNP Paribas didn’t borrow dollars from the ECB, Paris-based spokeswoman Carine Lauru said by phone today.

U.S. money-market fund managers have cut their lending to French banks at a pace that may force them to raise capital by selling assets, according to a Sept. 9 report by William Prophet, a desk analyst at Deutsche Bank Securities Inc.

Societe Generale Chief Executive Officer Frederic Oudea said in an interview with Bloomberg Television yesterday that the bank could resist a freeze in dollar financing from U.S. money-market funds indefinitely.

“Even if it were to go to zero, there would be no problem,” Oudea said. “We have plenty of buffers of liquidity and we are adjusting to the reduction in the money-market fund exposure.”

Disposals

Societe Generale, France’s third-largest bank by assets, reduced its short-term dollar funding to 60 billion euros ($82 billion) by the end of August from 72 billion euros at the end of June, the bank said on Sept. 12. Societe Generale also said it plans to free up 4 billion euros in capital through disposals by 2013 to reassure investors about its finances.

BNP Paribas’s cost of borrowing in dollars has risen in the past four weeks amid concern U.S. money-market funds are shutting off lending to France’s banks because of their holdings of Greek government debt. BNP Paribas yesterday said it is able to finance its dollar needs at normal levels “directly and through foreign-exchange swaps.”

The Paris-based bank said today it aims to boost its common equity tier 1 capital ratio to 9 percent by the start of 2013, under Basel III rules, as it scales back U.S. dollar corporate- and investment-banking business.

--With assistance from Fabio Benedetti-Valentini in Paris. Editors: Matthew Brockett, Frank Connelly

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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