European banks borrowed over 50 billion dollars on Wednesday from the European Central Bank (ECB), the first offering after the reduction of the cost of borrowing funds in cooperation with five other central banks, and it reflects the problems of credit institutions to finance in US dollars. The major central banks in the euro area, U.S., Switzerland, United Kingdom, Canada and Japan last week announced coordinated measures to ensure liquidity in dollars to banks outside the United States.
Banks in Europe have greater problems in obtaining funding in dollars of the market, due to fears of their exposure to sovereign debt crisis, according to Reuters. ECB announced that banks requested 50.7 billion dollars for a period of 84 days and $1.6 billion for a week. Demand has exceeded expectations of ten billion dollars of traders polled by Reuters. The higher than expected demand was attributed by traders to problems in the countries hit by debt crisis.
As the costs of funding from the ECB have been reduced, part of the program coordinated with other central banks, the funds bid became more attractive to commercial banks and lending costs for three months were close to those in the interbank market. Three-month Libor rate, an indicator for the cost at which banks lend to each other, reached 0.53775%, a level last seen in the middle of last year, when the debt crisis accelerated. ECB hopes that by providing liquidity in dollars to determine the reduction of these costs.
Analysts believe that the transactions in dollars are beneficial, but the permanent impact of them is overestimated. “What matters is what will BCE do at the monetary policy meeting on Thursday, especially on longer-term refinancing operations and the rules for collaterals. It would be useful today if we would have such funding with longer maturity”, Societe Generale economist, Michala Marcussen, said.
ECB may announce refinancing operations with very long periods, of two or even three years at the monetary policy meeting tomorrow.
