More On That European Liquidity Crisis: A Sudden Surge In Dollar Funding Needs?

The most amusing explanation we have read so far for the dramatic spike in punitive MLF borrowing over the past two days is that there has been a "fat finger" from a bank which indicated a too low allocation at the last term MRO. In other words, someone moved the decimal comma and now has to pay an additional 100 basis points of interest (annually) on €16 billion in borrowings. Citi's Jurgen Michels explains it best: "After the strong use of the ECB’s marginal lending facility yesterday by €15bn there is a further increase in the use of the facility to €16bn today. This suggests that some banks have not tapped enough liquidity in the ECB’s Main Refinancing Operation (MRO) on Tuesday, which was allotted on Wednesday. The MRO – which is still provided with full allotment – only had a modest use of €137 bn. Comment: Unless the ECB provides term-liquidity until the end of the running MRO (next Tuesday) we will continue to see a high use of the marginal lending facility." In other words: the ongoing surge in the MLF borrowings is now priced in. And to confirm just how clueless in reading market information CNBC is, the Comcast station looked at flat Euribor as an indication of market calmness. Unfortunately, as European banks have bypassed borrowing from each other (for about a year now) and go straight to the ECB either directly or via collateral pledges, as a lender of first and last resort, Euribor is about as useful as you know what on a nun. We present another stress indicator, which however is much more difficult to replicate: European Commercial Paper, denominated in dollars. And the surge there is unmistakable.

As the chart above shows, there have been several dramatic jumps in the US (top tier) ECP rate over the past week, and no sorry, these can not be attributed to HFT fat fingers or frontrunning (yet). Basically, it indicates there has been a substantial surge in the need for dollar funding. Are banks merely filling USD funding gaps through ultra-short term EUR borrowings, and proceeding to convert this capital to dollars in the open market? Keep an eye on the EURUSD for signs of weakness - if indeed banks are in dollar funding shortfall, it will likely manifest itself in the FX market.