Money markets no dollar funding crunch in sight for europes banks

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* Fitch data shows U.S. lending to European banks down 2 pct* Lower demand, cheap ECB lines limit dollar funding risks* Dollar swap costs stable, no repeat of Nov. 2011 spike seenBy William JamesLONDON, May 23 U.S. money market funds remain cautious over their lending to European banks, trimming exposure by 2 percent since the end of March, Fitch ratings said on Wednesday, but the data showed no sign of another dollar funding crunch on the horizon. Despite high anxiety in the financial markets over the growing possibility that Greece may be forced to leave the euro zone, the Fitch data shows Europe's banks are still able to borrow the dollars they need from the U.S. market."(Money market fund) holdings appear to be following a 'wait and see' approach until a clearer pattern emerges," Fitch wrote in the report.

In late 2011, access to dollars froze up as U.S. lenders cut lines of credit when the euro zone debt crisis threatened to engulf the large economies of Italy and Spain. This forced euro zone banks to pay a huge premium to get hold of U.S. currency. Overall lending to European banks is still half what is was in May last year, Fitch said. In part, this can be ascribed to financial institutions cutting back on their dollar liabilities and the provision of cheap loans from the European Central Bank."We saw (last year) the risks that U.S. funding could vanish quite quickly, so on the one side we have reliance on dollar funding maybe slightly lower, and then the ECB still provides a psychological backstop with its tenders," said Commerzbank strategist Benjamin Schroeder.

In November the three-month cost of swapping euros into dollars, a key funding channel for banks and a gauge of stress, hit 167 basis points. The premium on Tuesday was 53 basis points ."Front end basis (swaps) have been remarkably stable lately. Although they have fallen back in recent weeks, this has been a mere blip compared to the kind of moves we saw in the second half of last year," said ICAP analyst Chris Clark.

CAUTION PREVAILS The November spike in dollar funding costs prompted central banks to coordinate efforts to head off a crisis by allowing banks to take out three-month dollar loans at below-market rates. Much of that cash has now been paid back, supporting the view that dollar funding concerns have eased. At the latest ECB operation on Tuesday, banks borrowed $10.3 billion, $4 billion less than the amount they had to return. While the risk of a full-blown dollar funding crunch might have been taken off the table by the access to ECB loans, the Fitch data showed U.S. funds were looking at more secure ways to lend money to Europe's banks. In April, the percentage of U.S. money market fund exposure to Europe via repurchase (repo) transactions, where an asset is used to secure the loan, hit a new high of nearly 33 percent of all exposure, Fitch said."While ECB policy actions have helped to allay short-term investor concerns, the preference for secured exposure in the form of repurchase agreements continues to indicate that (money market funds) remain cautious," the report said.