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USD liquidity provisions: EUR relief likely to be temporary says Barclays Capital Research

Courtesy of Mish

Via email, I have no link …

USD liquidity provisions: EUR relief likely to be temporary

The ECB has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months on October 12, November 9 and December 7. These will be conducted in addition to the ongoing weekly seven-day operations announced on 10 May 2010 at a fixed rate that is yet to be announced. In the past, that rate was equal to 3m USD OIS +100bp.

European banks, in particular French ones, have been reported to be facing USD funding pressures over the past few weeks. These have also been evident in the recent fall in the EUR basis and rise in the spread between Euribor and OIS spreads.

The EUR has rallied as a result of the measure: it offers term USD liquidity to strained European banks and gives some breathing room to the European authorities. However, the move is being amplified by short positioning and is likely to be short lived. This measure just alleviates one of the symptoms of the euro area debt crisis and, if anything, confirms the liquidity constraint that banks are facing. It also illustrates why the USD is the best hedge for real problems in the EA, not European currencies such as the NOK or SEK. If the crisis intensifies, investors will likely continue to favor the greenback: USD haven demand will always be a safe way out in times of trouble.

I agree with Barclay’s analysis calling the liquidity measures a Band-Aids and Rubber-Bands Approach earlier today.

Band-Aids and Rubber-Bands

That the ECB, FED, Bank of Japan, and Swiss National bank have to provide liquidity to calm the markets is hardly calming news, yet the market continues to react well to band-aid and rubber-band measures … for now.

It won’t last because nothing has been solved and attempts to revive the Eurobond idea is Dead-on-Arrival.

Either Merkel and Sarkozy are attempting to buy time, hoping beyond hope to preserve their failing legacies, or are delusional.

I suggest a combination of the three.

Mike "Mish" Shedlock 


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