ECB Deposit Facility Usage Hits Record As European Bank Liquidity Conditions Continue Deteriorating
According to the ECB, the June 1 usage of the Central Bank's Deposit Facility Usage has hit an all time high of €316.4 billion, an amount greater than seen any time before, including the days after the Lehman bankruptcy, and the March 2009 lows. This surge is an indication that European banks continue to perceive the continental liquidity situation as dire, as banks receive a submarket 0.25% on funds held with the ECB, as opposed to the 0.33% paid out by money markets. Is the European liquidity crisis now shifting aggressively into the shadow economy, with money market getting impaired under the radar? Should that be the case, it is likely that the European repo market is also in jeopardy, although don't expect to hear about this until it is too late, when there is no liquidity to be found at all. As we pointed out yesterday when comparing Euribor and EUR Libor, the sense of counterparty risk is now greater than it was in late 2008: this is likely another factor forcing banks to bypass any potentially insolvent counterparty altogether and store funds overnight with the safest entity of all, even if it means a haircut on returns.
The WSJ is also worried about the implication of a surging Euribor:
Fears about the health of the region's banks also pushed up euro interbank offered rates--or Euribor rates, at which banks lend funds to each other. The three-month benchmark rate hit 0.704% Wednesday--the highest level since late December 2009. By comparison, the rate stood at 0.634% at the end of March.
Higher Euribor rates imply increased funding costs for banks, which they may pass on to their corporate customers. Economists warn it could put a brake on the euro zone's economic recovery.
In short, nothing continues to be fixed in Europe, with Jean Claude Trichet just hoping that with greater distractions like the BP cam out there, skeptics will soon tire of worrying about a European financial system that is once again insolvent, and instead throw all of the Other People's Money under management into banks such as BBVA and Santander, which as is well-known continue to exist on liquidity vapors.