Bloomberg News

Central Banks Seeking Quick Fix Push Dollar Cost to August Lows

September 15, 2011

Sept. 15 (Bloomberg) -- Policy makers’ decision to offer unlimited dollar loans pushed the cost for European banks to fund in the U.S. currency back to levels at the end of August, indicating markets view the measures as a short-term fix.

“This has done a trick,” said John Raymond, an analyst at CreditSights Inc. in London. “Whether it’s done the trick is another matter. The underlying issue of Greece is still there.”

The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, plunged 16.8 basis points to 81.9 below the euro interbank offered rate in London. That’s after the European Central Bank and peers in the U.K., Switzerland, Japan and the U.S. said they’ll provide unlimited three-month money to lenders in three tenders starting October.

The central banks acted after dollar funding dried up for European banks in general, and French lenders in particular, amid concern Greece is headed for a default. Credit Agricole SA and Societe Generale SA had their long-term credit ratings cut one level this week by Moody’s Investors Service, which cited their reliance on short-term funding and Greek exposure.

“If you think that Greece is going to default, as I do, and that the individual governments and central bankers are going to do all they can to prevent the problems getting out of control, this is a consistent step” by the central banks, said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “They may as well put in place as many things as possible in advance of a default,” he said.

One-Year Swaps

The one-year cross-currency basis swap was at minus 62.1 basis points, from minus 75.2 basis points on Sept. 13.

A gauge of banks’ reluctance to lend to each other in Europe fell for a third day, while staying within seven basis points of the highest level in 2 1/2 years.

The Euribor-OIS spread, the difference between three-month Euribor and overnight indexed swaps, was at 77.6 basis points, from 79.6 yesterday. The gap was at 84.6 basis points on Sept. 12, the highest since March 2009.

Two banks this week borrowed dollars from the ECB in its seven-day operation, a sign they were finding it difficult to access the U.S. currency in the markets as Europe’s debt crisis makes financial institutions more wary of lending. The ECB allotted $575 million in its seven-day dollar operation yesterday, without naming the banks it lent to.

‘Running Sore’

The dollar shortage for European banks had “become a running sore for the markets and for individual banks,” said Roger Francis, an analyst at Mizuho International Plc in London. The problem “was getting worse and worse all the time,” he said.

The cost of insuring European bank debt plunged by the most since at least March after today’s coordinated central-bank action, though it only fell to the lowest level in a week, according to credit-default swap prices.

The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers dropped 22 basis points to 263, the lowest since Sept. 8, while the subordinated index was down 44.5 basis points at 473.

A basis point on a credit-default swap protecting 10 million euros ($13.9 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Stocks rose in the U.S., with the Standard & Poor’s 500 Index increasing as much as 1.3 percent to a more than one-week high of 1,200.

“The power of this regards market confidence,” said Peter Chatwell, a strategist at Credit Agricole Corporate & Investment Bank in London. “The central banks are working together to deliver policy responses, so the market will gain confidence that if more easing is required in a concerted fashion, then it will be delivered.”

--Editors: Paul Armstrong, Andrew Reierson

To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net; Ben Martin in London at bmartin38@bloomberg.net.

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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