September 16, 2011
FIVE major central banks have moved in concert to pump US dollars into the European banking system by arranging three new funding operations, an action aimed at stemming a new liquidity crisis.
The European Central Bank said it will be joined by the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three US dollar liquidity-providing operations.
The action addresses an acute shortage of dollar availability as US lenders withhold funds out of concern that the European banking system is overexposed to the region's government-debt crisis.
The tenders appear aimed above all at ensuring that European banks keep access to US dollar funding, after months in which private-sector investors have refused to roll over existing credits. In the new tenders, banks bidding, say, at the ECB for funds, will receive US dollars. But the Fed's actual counterparty will be the ECB, not the banks that use the facility, reducing the risks of the transaction for the Fed.
The euro surged by more than 1 per cent against the US dollar and the yen following the central banks' move.
European equity markets also shot higher, led by shares of French banks, which have been tangled in the crosshairs of the continuing European sovereign-debt crisis over their exposure to Greece's debt. BNP Paribas shares traded 15 per cent higher, while Credit Agricole was up 8 per cent and Societe Generale was 7.4 per cent higher.
BNP Paribas and Societe Generale have acknowledged that access to US dollars through US money-market funds has been drying up and both have said they have secured alternative sources of US dollars. They have also cut back on US dollar-denominated lending and sought to sell assets in a bid to bolster their capital, marking a potentially worrying development for a slowing economy in France and elsewhere.
German bunds and British gilts fell sharply as risk sentiment got a lift from the market. The December bund-futures contract fell 151 ticks to 135.36, while the December gilt futures contract plunged by 145 ticks to 128.70.
"It's obvious the ECB is working hard to get ahead of the market's skittishness about funding availability and the markets are responding accordingly as earlier losses in safe-haven assets are extending with risk assets surging," said Adrian Miller, senior vice president of fixed-income strategy at Miller Tabak Roberts Securities.
The new US dollar tenders, under which banks will be able to bid for unlimited funds, will have a maturity of approximately three months covering the end of the year, the ECB said. They will be conducted in addition to the bank's regular funding operations. The tender dates will be October 12, November 9 and December 7, the ECB said.
The ECB last offered three-month dollars in May last year.
"This comes as good news," amid "increasing signs of tension in US dollar funding for euro-zone banks," said Marco Valli, an economist at UniCredit in Milan.
European banks have lost access to more than $US700 billion in US-dollar funding --short-term IOUs and interbank loans -- over the past year from US money-market funds and others worried about exposure to Greece and other troubled European economies, according to JP Morgan Chase. and CreditSights research.
That has forced the banks to curtail US dollar-denominated lending and find dollars far afield, such as in the Middle East.
European banks need the US currency to fund loans they have extended to US companies and consumers. European banks also need dollars to repay past borrowings they made in dollars, such as loans from US money-market funds.
On Wednesday, the ECB said two banks had tapped it for $US575 million, only the second time in six months the ECB has doled out US dollar funding. The names of banks that tap the ECB are kept confidential.
It remains to be seen at what rates the swap facility will be offered. The one-week funds have been deliberately offered at a rate well over the interbank market rate for dollars, so as to discourage its use.
The central banks' joint move could be enough to avert a funding crisis for now, said Greg Anderson, senior foreign-exchange strategist at Citigroup in New York. "If there is some other massive shock it may not prove to be enough but to proactively deal with year-end issues, it is probably enough."
But Geoffrey Yu, director of foreign-exchange strategy at UBS, argued that banks will continue to sit on liquidity as euro-zone governments continue to procrastinate over a solution to the debt crisis.
"This doesn't change anything," he said. "It helps the banks for the next couple of months but that's it."
Article by Tom Fairless, Todd Buell and William Launder From: The Wall Street Journal Additional reporting: Geoffrey Smith, Neelabh Chaturvedi, William Kemble-Díaz and Anusha Shrivastava