Money markets demand for feds central bank swaps could rise

← Homepage

* Central bank liquidity swaps program shrinks-Fed data * Demand for swaps could rise if money markets face new stress * Concerns about euro zone banks vs sovereign relationship rise By Ellen Freilich NEW YORK, April 13 The Federal Reserve's outstanding central bank liquidity swaps program has shrunk to its lowest level since early December, but if conditions in European unsecured bank funding markets deteriorate, demand for those swaps could rise. According to the Fed's latest balance sheet update, outstanding dollar liquidity swaps fell to $32 billion in the week ended Wednesday. But money market players are preparing for a new round of financial stress as concern over euro zone banks' exposure to Spanish and Italian government debt grows and borrowing costs for the two countries rise. If conditions in European unsecured bank funding markets deteriorate as a result, demand for the Fed's dollar liquidity swaps may rise, said Barclays Capital market analyst Joseph Abate. Data released Friday showed Spanish banks borrowed a record 316.3 billion euros from the European Central Bank in March because market funding was more expensive. Italian banks also borrowed 270.1 billion euros, earlier data showed. The Fed has coordinated with the European Central Bank to provide swap lines to offer dollar liquidity to European banks at times of stress in money markets. As Spain tries to cut spending without plunging its economy deeper into recession, talk of "contagion risk" has revived and Spanish and Italian yields have been rising since mid-March. Meanwhile, weekly demand at the ECB's one-week operations has ebbed as replacement demand for maturing operations fades. Though the ECB's two massive three-year loan operations provided euro funding to the banks, confidence effects, along with reduced overall dollar and euro funding needs, have helped to reduce Libor since the start of the year, Abate said. LIBOR'S NEXT DIRECTION London Interbank Offered Rates