It is not only the Chinese interbank market that has found itself in a liquidity vacuum. A quick look at recent moves in European overnight lending rates shows that in the past two weeks the key Eonia overnight rate hit a multiyear high of 1.549%, which was rather disturbing because as Reuters points out "Factors related to the end of the first half of the year, when banks tend to lend less as they square up their books, also kept cash prices over two weeks near the European Central Bank's main refi rate of 1.25 percent, money market traders said." Of course, concerns about Greece are a far more prevalent factor in the closed loop that is liquidity evaporation. Which is why the Eonia plunge to 1.091% on Wednesday would have been surprising in isolation, but not if one considers that during yesterday's ECB Main Refinancing Operation (MRO), banks borrowed a whopping €186.9 billion in 7 day funding at a fixed rate of 1.25%. This is €50 billion more than what was borrowed in the past week, and as the chart below shows, is the highest since January when the market was once again concerned about European exposure to Portugal and Ireland (then subsequently forgot all its concerns for about 5 months).
On the other hand, while the overnight rate dropped, this emergency liquidity scramble did nothing to improve longer-term liquidity: "While one-week Euribor rates were fixed lower at 1.22 percent on Thursday, from 1.258 percent the previous day, three-week rates remained above the refi rate at 1.28 percent with the key three-month rate unchanged at 1.526 percent. "The ensuing lower rate on the daily fixings is pushing short-end Eonias, and Euribors, lower but lending restrictions over the half-year turn and the ongoing problems in Greece are keeping cash prices in all the weeks at elevated levels with bids in two and three weeks close to the refi rate," said Kevin Pearce, a senior broker at ICAP." And perhaps the most notable observation in yesterday's MRO operation, is that the number of banks tendering for ECB liquidity surged to 353: higher by 118 from the week earlier as the liquidity contagion spreads, and the highest since September 2008, save for January again, when 371 banks were rushing to suckle at the ECB's teat (which itself is quite insolvent courtesy of the billions of massively underwater bonds it has used as collateral and direct loans it has made to Greek banks).
And here is why the number of MRO borrowers is likely to continue to rise:
"The ensuing lower rate on the daily fixings is pushing short-end Eonias, and Euribors, lower but lending restrictions over the half-year turn and the ongoing problems in Greece are keeping cash prices in all the weeks at elevated levels with bids in two and three weeks close to the refi rate," said Kevin Pearce, a senior broker at ICAP.
1 Week MRO borrowings:
Number of MRO tender banks: