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Eonia Surge Mystery May Be Result of Excess Greek Bank Liquidity

Published 12/01/2017, 11:47 AM
Updated 12/01/2017, 12:30 PM
© Reuters.  Eonia Surge Mystery May Be Result of Excess Greek Bank Liquidity
CBKG
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(Bloomberg) -- A sudden spike in the interest rate for overnight loans between European banks may be the result of excess liquidity injected into the market by Greece’s second-biggest lender, according to two bankers with knowledge of the matter.

National Bank of Greece SA had excess liquidity of around 450 million euros ($536 million) this week, which it loaned to its peers in the country, the people said. While the flood of funds and the increase in interbank lending in Greece is good news, the rates at which borrowers from the country can access funds are still higher than for the rest of the continent, thus pushing up the weighted average of the overnight rates in Europe, one of the people said.

Salaries that were deposited by Greek civil servants and higher receipts from repurchase agreements provided National Bank of Greece with more liquidity, the person said, asking not to be named because the matter is not public. Other Greek banks found the rate offered by National Bank of Greece appealing, thus drawing on the cash, the people said.

Thursday’s fix rose six basis points to -0.241 percent, the highest since March 2016. The rate has jumped 12 basis points in the past two days. A move on that scale would normally only be justified by a shift in the European Central Bank’s benchmark rate or by funding stress among the banks.

Read more: What Is Eonia and Why Is It Worrying Traders?: QuickTake Q&A

The surge in Eonia fix appears to be potentially due to a single institution’s short-term funding requirements, given there’s nothing in ECB liquidity data to suggest stress, Bloomberg rate strategist Tanvir Sandhu said in a note.

Some traders attributed the jump in the Eonia rate to possible year-end funding squeeze at some lenders, while others pinned it down to demand related to Greece’s just-concluded bond swap. Even though there hasn’t been a convincing explanation, “it could be down to a month-end distortion at some bank,” Commerzbank AG (DE:CBKG) said.

The Eonia rate is fixed at around 12:45pm New York time.

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