MONEY MARKETS-Signs appear that ECB’s zero-rate move may work

by on September 25, 2012 2:42 pm GMT

LONDON, Sept 25 |
Tue Sep 25, 2012 10:42am EDT

(Reuters) – The European Central Bank’s cut
in its deposit rate to zero may be slowly breathing life into
euro zone unsecured money markets, though the evidence is far
from conclusive.

After a slight dip in August, mainly due to seasonal
effects, volumes in the euro zone overnight Eonia rates
market have inched higher this month and on one day last week
topped 30 billion euros for the first time since April.

This, to some analysts, is a sign banks are widening the
list of counterparties they choose to lend to as record low
rates prompt them to take more risk to increase returns on their

“What we’re seeing is that some of the high-quality banks
have started to lend to lower quality banks. In order to get
some remuneration they are willing to take more risks,” said
Barclays Capital rate strategist Giuseppe Maraffino.

Daily average Eonia volumes for September are 25.7 billion
euros, compared with 20.9 billion in August, 23.7 billion in
July and 23.5 billion in June, according to Reuters data.

In September 2008, before the financial crisis froze
interbank lending, daily Eonia volumes reached more than 70
billion euros.

The data diverges from volumes seen in the equivalent
overnight Euronia rate, which is arranged by a
much smaller panel of top-rated money brokers.

Since just before the ECB’s July’s deposit rate cut, volumes
in Euronia have shrunk almost three-fold to just below 3 billion
euros, according to Barclays data. Euronia last fixed at -0.0017
percent, compared with 0.095 percent for Eonia.

The Euronia data suggests that trade among top-rated money
market players are shrinking in volume while the Eonia data
suggests some of those players may be lending to perceived
lower-rated counterparties.

“This is a very encouraging sign. If the improvement in
market sentiment continues, (Eonia) volumes should continue to
rise,” Maraffino said.

Euronia is fixed in the UK by the Wholesale Markets’ Brokers
Association, while Eonia is calculated in Frankfurt by the
European Central Bank.


However, there is an important shortcoming to the hypothesis
that banks are beginning to expand the list of lenders they want
to do business with again — the fact that usually banks need
more cash for window-dressing before the end of a quarter.

“There is more lending going on and this is consistent with
the overall developments in markets,” Commerzbank rate
strategist Benjamin Schroeder said, referring to an increase in
investors’ appetite for risk following the ECB’s rate moves and
its pledge to buy potentially unlimited amounts of government

“But it may also be related to quarter-end activity so I
don’t know if we should read too much into these volumes at this
stage,” Schroeder added.

A turn for the worse in general sentiment is also possible,
with investors uncomfortable with the fact that Spain, at the
forefront of the euro zone crisis, appears reluctant to ask for
a bailout and activate ECB bond-buying.

Outside interbank markets, some money market players have
also noticed an increase in demand for cash products.

“We see continued growth (in demand for) assets up to
one-year,” said Shahid Ikram, chief investment officer at Aviva
Investors in London.

“Zero-rate policy from central banks has meant that
corporates and banks have been able to issue very efficiently
and there has been significant demand for that.”