March 17, 2020 / 4:33 AM / 16 days ago

Bank of Japan, U.S. banks join forces to ease global dollar funding stress

TOKYO/SEOUL (Reuters) - The Bank of Japan on Tuesday made its biggest injection of dollar funds since 2008 and South Korea also pledged to act soon as major central and commercial banks joined forces to alleviate broad shortages of U.S. dollar financing in global markets.

The moves came as banks and companies rushed to secure their dollar cash piles in the face of growing fears of a crippling blow to their businesses from the coronavirus crisis.

The Bank of Japan conducted an 84-day dollar funding operation, its first after global central banks agreed this week to offer three-month dollar credit to ease funding constraints.

The takeup, of $30.272 billion, was the largest since the BOJ offered $30.584 billion in an 84-day dollar funding operation on Dec. 2, 2008, in the wake of the market turmoil triggered by the global financial crisis. The BOJ also supplied $2.053 billion in a seven-day operation.

The deepening economic impact of the pandemic has plunged major stock markets into bear territory and forced investors to liquidate their holdings of commodities, stocks and riskier bonds.

That, and a rush by companies to secure dollar funding out of concern about supply chain disturbances and future cash flow, has led to a scramble for dollar financing.

Funding constraints could ease gradually after big dollar injections from the BOJ and other central banks, said Yusuke Ikawa, Japan strategist at BNP Paribas.

“Today’s results suggest that there is now abundant dollar cash at least among people who have access to the BOJ. The key point now is whether this money will spread to various companies and others that need them,” he said.

To ease the dislocation, the Fed cut interest rates by a full percentage point on Sunday. The world’s six major central banks also took a joint step to provide more dollars.

South Korean government officials told Reuters they will announce measures on Wednesday to ease dollar funding conditions in the domestic markets.

In the United States, the eight largest U.S. banks said they would jointly access funding from the Federal Reserve’s so-called “discount window.”

The banks said that while they are strong and well-capitalized, the move is aimed at reducing the stigma attached to that low-interest emergency funding tool, after banks shied away from it following the 2008 financial crisis.

CREDIT STRAINS

Despite the Fed’s emergency 100-basis-point rate cut and the renewal of its quantitative easing program to increase cash in markets, there has been little noticeable easing in the rush for dollar financing offshore.

While funding conditions among banks appear to be improving, companies across the board, not merely the hard-hit airlines and energy firms, have struggled to access dollar funding.

Nor was it clear interbank stresses were easing. The dollar/yen basis swap - the premium investors pay over interbank rates to swap yen into 3-month dollars - eased to 91 basis points JPYCBS3M=TKFX from high of 142 basis points on Monday. But the three-month euro/dollar basis widened to 86 basis points EURCBS3M=ICAP from 72 on Monday.

The FRA-OIS spreads <0#USDFWDF-O=R>, which measure the difference between term lending and overnight rates and are a gauge of banks’ credit risks, also eased but only fractionally.

(GRAPHIC: Funding stress in credit markets - here)

Investors are now hoping the Fed will unclog the flow of loans to companies by reviving a repurchase program for commercial paper that companies use to raise short-term cash, as it had done in the aftermath of the 2008 crisis.

Financial markets, meanwhile, remain under heavy stress as the receding risk appetite coupled with the constraints of quarantines and telecommuting sap liquidity, leading to erratic moves.

“We expect see further improvements after NY markets digest the Fed’s actions. But in some markets such as credit, securitization and emerging markets, it is questionable whether liquidity will recover quickly,” said Keita Matsumoto, head of investor sales at Citigroup Global Markets.

Reporting by Hideyuki Sano in Tokyo, Pete Schroeder in Washington and Elizabeth Dilts Marshall in New York and Cynthia Kim in Seoul; Editing by Vidya Ranganathan & Shri Navaratnam

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