The European Central Bank launched its first six-month refinancing operation on Wednesday – but the action failed to ease tensions in the money markets as concerns over further bank writedowns and liquidity weighed on sentiment.
The auction of €25bn ($39bn) in six-month funds marked a significant extension of the ECB’s armoury in its attempts to relieve pressures on short-term interbank rates.
The refinancing tender attracted €103bn – making it more than four times subscribed – in orders from 177 banks, highlighting the strong demand for cash among European banks. It also underlined the elevated interest rates at which banks are ready to borrow.
The ECB offered the cash at an average rate of 4.61 per cent, which is high given the quality of collateral offered in exchange for the funds.
Significantly, the key three-month European interbank rate, Euro Libor, edged up to 4.740 per cent on Wednesday – a high this year – from 4.737 per cent on Tuesday. The rate was 4.750 on December 27.
Jonathan Loynes, chief European economist at Capital Economics, said: “Some people think the worst of the financial crisis may have passed with the writedowns this week [UBS announced $19bn in writedowns for the first quarter and Deutsche Bank announced $4bn], but one thing that argues against that is the continuing high levels of interbank interest rates, which are more than 70 basis points over official rates.
“Banks are still keen to stockpile cash to make sure they can meet their own liquidity needs. The bottom line from an economic point of view is that central bank action has not eased interbank rates.”
Julian Callow at Barclays Capital said the elevated rates in the interbank market were equivalent to an extra 50 basis points on the ECB’s policy rate – currently 4 per cent – in pre-credit crunch conditions.
Matthew Tatnell, head of money markets at Morley Fund Management, added: “There is still pressure in the system. Institutions still want that extra premium to invest as there is a lack of confidence out there and a feeling there will be more writedowns to come.
“Access to liquidity is key for investors and we need central banks to remain active, keep pumping in liquidity to ease the pressures and restore confidence. Ideally, we could do with another round of co-ordinated central bank intervention, which would help bring rates lower.”
Yesterday’s move was one of two six-month refinancing operations announced last week. The second, also for €25bn, will be launched in July and cover the end of the year.
US dollar Libor and sterling Libor also remained at elevated levels. Three-month dollar rates rose to 2.700 per cent yesterday from 2.681 per cent on Tuesday, while sterling rates eased to 6.003 per cent from 6.005 per cent.
