Reuters logo
UPDATE 1-Little hope yet in euro bank rates slide to record low
July 16, 2012 / 12:52 PM / 5 years ago

UPDATE 1-Little hope yet in euro bank rates slide to record low

By Ana Nicolaci da Costa
    LONDON/FRANKFURT, July 16 (Reuters) - Euro zone bank-to-bank
lending rates hit new all-time lows on Monday after the European
Central Bank eased monetary policy earlier this month and could
ease further before stabilizing at a premium over overnight
rates.
     The ECB cut its main interest rate on July 5 to a record
low of 0.75 percent and reduced the deposit rate it pays banks
for parking money with it overnight to zero in an effort to
breathe life into the flagging euro zone economy. 
    That has driven the short-term Euribor rates that banks
publish for lending to each other to an all-time low, which in
turn should encourage consumers and companies to borrow more at
the lower rates.
    But that fall for the moment looks academic given that
nervousness over economic and systemic threats are still
prompting banks in reality to keep vast quantities of their cash
parked at the ECB.
    The unprecedented cut in deposit rates to zero means
institutions get no return on that cash but net that has made
more difference to the amount of money parked at the ECB - much
of it has just been shifted to a current account facility which
also offers no interest. 
    That suggests that, at least initially, no-one in the sector
has enough faith in public finances in the euro zone, its
banking sector or the health of a reeling economy to risk
lending more. Most analysts are sceptical that will change.
    "It doesn't matter what rate it is, the banks aren't going
to lend," one trader said. "Balance sheets haven't been restored
and what's going on regarding Libor, more banks are going to get
fined, that's a hit on their balance sheet as well."
    Barclays Plc, the bank at the center of a scandal
over the attempted manipulation of London's Libor system of
setting interbank rates, was fined a record $450 million last
month by U.S. and British authorities.
    It is the only bank so far to admit any wrongdoing in giving
false information as part of the complex process of setting
Libor, but more than a dozen banks are expected to be drawn into
the scandal, which is being probed by authorities in North
America, Europe and Japan.
    Three-month Euribor rates, traditionally the
main gauge of bank-to-bank lending, hit a new all-time low of
0.477 percent on Monday, down from 0.486 percent on Friday. 
    
    ROCK BOTTOM OVERNIGHT 
    The trader expected Euribor rates to stabilize around
0.30-0.35 percent, offering a premium over Eonia overnight rates
which have also fallen steadily since the ECB rate cut.
    Eonia rates were last at 0.12 percent, having
fallen sharply after deposit facility rate  - which serves as a
floor for bank-to-bank overnight rates - was cut to zero.
Forward contracts suggest those rates will only stabilise at
around nine basis points. 
    "Expectations of low Eonia rates have become deeply
entrenched. Eonia is now expected to rise above 75 basis points
(0.75 percent)only after three years," Deutsche Bank said in a
research note.
    Richard McGuire, strategist at Rabobank, also does not
expect the reduction in the deposit facility rate to spur bank
lending in the current scenario.
    "We are still flirting with recession in Europe and in the
developed world and hence banks are reticent to lend against
such a backdrop," McGuire said, explaining the reasons why banks
are hoarding cash.
    "Borrowers are also on the whole unwilling to borrow.
Companies are cash rich because they are not investing, they are
not investing for the same reasons banks aren't lending, they
don't see a profitable investment opportunity, they are worried
about the economic outlook."

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below