Banks in the eurozone are so awash with cheap cash from the European Central Bank that they no longer want to borrow from each other, in a striking reversal of the signs of stress in money markets in the spring.
Three-month Euribor — a measure of interbank interest rates in the euro area — has sunk to an all-time low of minus 0.49 per cent in recent days. The plunge in borrowing rates comes after eurozone lenders took more than €1.3tn in cheap loans from the ECB in June, part of the central bank’s drive to boost the region’s coronavirus-stricken economy.
“You have a central bank that’s absolutely relentless in providing cheap liquidity,” said Peter Schaffrik, a strategist at RBC Capital Markets. “That drives down lending rates across the board.”
Euribor had climbed to a four-year high of minus 0.16 per cent in April, a sign that some banks in the region were starting to face substantially higher funding costs as the economic impact of the pandemic weakened their balance sheets. That episode caused a closely watched gauge of fund stress in the euro area banking sector — the gap between Euribor and another money market rate called Eonia that tracks interest rates set by the ECB — to hit its widest since the eurozone debt crisis in 2012.
Rising funding rates raised the possibility that some might be forced to rein in their lending to businesses and households, further exacerbating the downturn.
But the ECB’s largesse since then has dragged rates back to record lows. The recent decline has pushed the Euribor-Eonia spread below zero since the first week of August, the first time it has moved into negative territory for longer than a day or two.
Antoine Bouvet, a senior rates strategist at ING, said banks had loaded up on ECB loans in June as a precaution. If they can demonstrate they are lending this cash on to the real economy, they will carry an interest rate of minus 1 per cent. Access to funding on such favourable terms leaves little need for lenders to borrow from one another on money markets.
“There is so much cheap liquidity in the system, banks don’t want to borrow any more, so they’re pricing themselves out of the wholesale market,” said Mr Bouvet. “From the point of view of the ECB, this looks like a success story.”
However, some analysts think the glut of liquidity masks lingering weaknesses in some corners of the banking sector.
“There’s a concern that what the ECB has done is artificially compress credit risk premia, without any of this cash necessarily finding its way into the real economy,” said Peter Chatwell, head of multi-asset strategy at Mizuho.
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