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Money markets draghi offers spanish bank, sovereign cds respite


The cost of insuring debt issued by Spanish banks and by the sovereign against default fell on Monday on bets the European Central Bank could soon resume its bond-purchasing programme in a bid to bring Spain's borrowing costs to sustainable levels. ECB President Mario Draghi said last week the central bank would do whatever it takes to protect the euro, prompting a majority of money market traders in a Reuters poll to say the central bank would soon re-start its bond-buying programme. Some analysts are worried that the market is getting ahead of itself, but many say Draghi knows better than to gamble his credibility and will have to deliver some sort of action after his bold statement last week."Draghi has seemed to put his credibility on the line to a certain extent. You think he must have some confidence that he will be able to deliver something," Gavan Nolan, analyst at Markit said. "It's just a matter of whether what he has announced is enough."In his boldest comments since taking the ECB's helm last November, Draghi pledged on Thursday to do whatever was necessary to protect the euro zone from collapse, specifically mentioning high risk premiums on some sovereign debt. The comments have gone some way to easing pressure on Spanish funding costs, which are now comfortably below the 7 percent danger level and credit default swap prices. But analysts are worried that any relief from such ECB action will be short-lived and that inaction would do a lot of damage given expectations.

CDS on Santander debt fell 25 basis points on Monday to 409 and the BBVA equivalent eased 16 bps to 426 bps. Those CDS prices hit record highs of 490 and 510 respectively last week, according to Markit data. The cost of insuring Spanish debt against default fell 19 bps to 532 bps and the Italian equivalent was 14 bps lower at 484 bps. Spanish CDS also hit a record of 638 bps last week."I think expectations are high  I think we would go to the previous wides (highs for CDS prices) if they did nothing," Michael Hampden-Turner, credit strategist, Citigroup.

"The market expects that he has something to announce, and that was a sort of a pre announcement. There is quite a strong risk that they get disappointed because we are sort of wondering what he could possibly have up his sleeve without (Germany) being in agreement."The Bundesbank pushed back on Draghi's pledge last week and the ECB chief will also meet Bundesbank President Jens Weidmann, a strong opponent of the ECB's government bond purchase programme, ahead of Thursday's ECB meeting. Chancellor Angela Merkel discussed the euro crisis with both French President Francois Hollande last Friday and then with Italian Prime Minister Mario Monti on Saturday.

After each call, the leaders issued joint statements pledging they would do everything to protect the euro zone, underscoring market expectations that something is in the works. Given bond-purchases' fleeting impact in the past, it could well be that the ECB is mulling another form of action but only a bolder move than bond-buying would have a lasting impact, analysts said."We will probably see (CDS spreads) grind tighter in the run-up to the meeting. I think a lot of it will have been priced in already by that stage, depending on what the announcement on Thursday is, unless there is something more radical than the simple reopening of the Securities Markets Programme," Nolan said."Something like giving the ESM a banking license, that would be a game-changer, but I think it's pretty unlikely that that will be announced."The ECB would like to see Europe's permanent bailout fund start buying the bonds of troubled euro zone members, but the fund's limited firepower could make its intervention less effective. One idea, favoured by France, is to give the ESM access to ECB funding with a banking licence - something that 17 out of 24 money market traders expect to eventually happen, although they were divided on when.

Money markets euro bank to bank lending improves amid scepticism


Oct 31 Surveys by the European Central Bank and others suggest the euro zone's bank-to-bank lending market may be finally starting to thaw, but many in the market remain sceptical. They point, in particular, to continued low trading volumes in overnight lending. The 'unsecured' market, where banks lend to each other without collateral, was the main funding source for many banks before it froze at the start of financial crisis. As sovereign debt worries have taken over, however, many in the struggling parts of the euro zone have been left with very little, if any, access to open markets. They have been almost completely reliant on ECB funding to stay afloat. But now the ECB's pledge to prevent the collapse of the euro by buying potentially unlimited amounts of bonds has spurred the first signs of a thaw in the money market."Banks reported an improvement in their access to retail and wholesale funding across all funding categories. For the fourth quarter of 2012, banks expect funding conditions to keep improving." the ECB's Bank Lending Survey said on Wednesday. The details show the pick up is likely to be small scale. Only a net 10 percent of banks questioned by the ECB see any form of improvement before year-end.

But the figures marry with a report by rating firm Fitch this week that showed U.S. money market funds are beginning to lend to the euro zone again."For the third consecutive month, U.S. prime money market funds increased their exposure to euro zone banks," it said, adding there had been a 16 percent rise in value terms since the end of August. Its analysis also showed the proportion of collateral-backed loans had dropped from 40 percent to under 25 percent over the last three months. With overall exposure rising, it suggests 'unsecured' lending was increasing."This reduction in secured exposure is another potential sign of a more positive investor posture towards banks in the region," Fitch said.

EONIA MOANS But while Fitch's findings point to a small rebound in trust in the bloc, the amount lent by funds to euro zone banks remains 70 percent below the level it was at the middle of last year. Money market traders also remain sceptical about whether there really has been an improvement.

Trading volumes in overnight money markets have averaged at around 25 billion euros over the last couple of months, around a third of the peak volumes seen towards the end of 2007 and roughly half of those at the end of 2010."I have not seen any improvement at all," said one money market trader working for a bank based in the euro zone's healthier northern core."Volume on Eonia is still very low and it is going to stay very low. We just have to wait till there is less stress around Spain and the other periphery countries and that is going to take time."As well as its pledge to keep the euro alive, the ECB's move earlier in the year to stop paying interest on money parked with it overnight has also forced some banks and funds to rethink their previous reluctance to lend to peers. At the same time, high penalty charges imposed on Spanish and Italian sovereign bonds by clearing houses like LCH. Clearnet and CCG has left banks in both countries willing to pay more for funding in the open market. Somewhere in the middle, deals are being done."Some of the UK banks have come in (and started lending to Spanish and Italian banks)," said another money market trader, who like the first requested anonymity."Levels (interest payments) above zero percent are fine for them and they are also doing it to cover their shorts," he added, referring to bets made on the value of a sovereign bond going down.