Money-market indicators that traditionally warned of stresses in the financial system are being muffled by a deluge of central bank cash as the euro-region crisis focuses on Greece’s future in the currency bloc and the meltdown of Spanish lenders.
The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 51.8 basis points below the euro interbank offered rate at 12:12 p.m. in London, from minus 50.3 basis points on June 15. The swap stayed in a range of 41.5 to 59.1 basis points below the benchmark in the past three months, even as an index of bank- bond risk surged 52 percent.
The ECB offered banks three-year loans for as much as they asked for, helping stave off a looming freeze in the interbank market, and teamed up with the U.S. Federal Reserve to ensure European lenders had access to dollars. The LTRO and dollar swap lines removed the threat of banks’ funding drying up and a financial-system failure.
Part of the reason for the tension in repo markets may be deposit withdrawal from banks in the euro area’s periphery, according to Sandy Chen, an analyst at Cenkos Securities Plc in London. Greek banks have lost more than 30 percent of their total deposits since the end of 2009 as companies withdrew about 45 percent of their money, Bloomberg data show.
The rates banks say they pay for short-term loans from their peers are also falling in defiance of the deepening euro-region crisis. Three-month dollar Libor has remained little changed since the end of March and was at 0.468 percent today. That’s the same rate it has been all month and compares with 0.583 percent on Jan. 5.