(Refiling to remove MONEY MARKETS headline tag, make slug UPDATE 3 instead of UPDATE 2)
By Dhara Ranasinghe, Saikat Chatterjee and Gertrude Chavez-Dreyfuss
LONDON/NEW YORK (Reuters) – The cost of raising U.S. dollar funds in the euro swaps market rose sharply on Monday after Western nations ramped up sanctions against Russia over the weekend, including blocking some Russian banks from the SWIFT international payments system.
Three-month euro cross-currency swaps hit 38.25 basis points, the highest since mid-March 2020, the beginning of the coronavirus pandemic, as foreign banks and companies scrambled for dollar funding.
In other words, investors were willing to pay around 38.25 basis points over interbank rates to swap three-month euros into dollars.
Last Friday, that three-month cost was 21 basis points and it was 8 basis points a month ago.
Cross currency swaps allow investors to raise financing in a particular currency from other funding markets. For example, an institution with dollar funding needs can raise euros in euro funding markets and convert the proceeds into dollar funding obligations via an FX swap.
“The widening of the euro-dollar basis is a sign of dollar funding stress for European banks,” said Antoine Bouvet, a senior rates strategist at ING.
“There are many question marks around the financial stability impact of sanctions, but it seems likely that they will temporarily make dollar funding more expensive for foreign banks.”
The rouble plunged nearly 30% to an all-time low versus the dollar on Monday, after Western nations on Saturday unveiled tougher sanctions including blocking some Russian banks from the SWIFT international payments system.
Analysts said the move by the United States and its allies to block Russia from using $630 billion in central bank foreign currency reserves over the weekend will make dollar funding costs expensive for Western companies who were getting paid by Russian counterparties.
“If the West does not want to or cannot lend U.S. dollars and euros to certain Russian entities, that means it becomes scarce and the cost of liquidity goes up,” said Kenneth Broux, an FX strategist at Societe Generale in London.
“For Western companies, it means central banks may have to provide dollar and euro liquidity.”
According to estimates by Credit Suisse’s Zoltan Pozsar, Russia holds about $300 billion in short-term money market instruments: $200 billion in FX swaps and another $100 billion through public and private deposits.
Concerns about the Russia-Ukraine war have filtered to U.S. funding markets.
The spread between the U.S three-month forward rate agreement and the three-month overnight index swap rate, a funding stress indicator, rose to 18.56 basis points on Monday, its widest since early July 2020
On an intraday basis, the gap was 23.75 basis points touched early morning in the New York session, the highest since May 2020. The higher spread reflects rising interbank lending risk or dollar hoarding.
The FRA-OIS spread measures the difference between the three-month Libor or the inter-bank lending rate and the overnight index rate, or the effective fed funds rate, which is the risk-free rate set by the Federal Reserve.
(Reporting by Dhara Ranasinghe, Saikat Chatterjee in London and Gertrude Chavez-Dreyfuss in New York; Editing by John Stonestreet and Jonathan Oatis)
