Monday, August 20, 2012

Dwindling volumes suggest European Central Bank depo cut backfired

LONDON, Aug 20 (Reuters) - Dwindling money market trading volumes suggest the European Central Bank's cut to zero in its overnight deposit rate may have backfired, leaving the market's slim expectations of further easing looking overdone.

The ECB cut the rate it pays for overnight deposits to zero from 25 basis points on July 5 in a bid to encourage banks to lend to one another rather than park cash at the central bank.

But total volume for trades on which the Eonia overnight rate is calculated has fallen to about 20 billion euros a day since the ECB's move, according to Thomson Reuters data.

This is the first time it has been so consistently low since at least mid-2007. Even accounting for the "summer lull", that is around 5 billion euros a day lower on average than over the same period in 2011.

"It's backfired massively, there's no volumes going through the market," one trader said.

"A lot of the funds can't trade without making a return so they're just closing and while the ECB may have hoped banks would lend for longer time periods, you can't expect them to just reinstate credit lines."

Part of the problem, the trader said, was that any bank's credit rating is directly tied to that of its sovereign, with rating agencies typically downgrading banks within a couple of days of cutting a country's ratings. Read More