Banks in Europe Pay More to Borrow Overnight Than Three Months

James Hirai
·2 min read

(Bloomberg) --

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A record cash glut is distorting European money markets, with euro-zone banks paying more to borrow overnight than for three months.

After the European Central Bank flooded markets with cash, banks are having to scramble to find a place to put all that money. That’s causing a shortage of short-term German bonds that’s especially acute as balance sheets get adjusted for year-end reporting.

It’s another sign of how unprecedented economic stimulus has turned markets upside down. In normal times, long-term funding should be more expensive because there’s a higher risk the money will not get paid back.

For the first time on Wednesday, the European Central Bank’s euro short-term rate, which reflects wholesale funding costs for one day, climbed above three-month Euribor, a benchmark based on the average rate that large banks can theoretically lend to one another.

The ECB doubled the amount of money it would accept as collateral from banks looking to borrow sovereign debt last week, a bid to meet burgeoning demand and ease the squeeze. For Antoine Bouvet, senior rates strategist at ING Groep NV, the only short-term option for the ECB is to further increase that amount.

“I’m not sure they can engineer a wholesale rethink of their policy tools before year-end -- and not sure they would want to given that this is essentially a year-end issue,” he said.

The ECB’s bond-buying program and ultra-cheap loans boosted the amount of spare cash in the economy to 4.5 trillion euros ($5.1 trillion) earlier this month.

ESTR, as the ECB’s overnight rate is known, rose 0.4 basis points to minus 0.570%. Three-month Euribor dropped to a record low of minus 0.583%.

(Adds analyst voice, context from 5th paragraph.)

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