How The Debt Crisis Rocked The Euro

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The European Central Bank (ECB) says the eurozone financial crisis has had a ‘significant impact’ on European money markets and is a key factor forcing down the value of the euro.

In a two-yearly report covering the second three months of 2012, the ECB says that aggregate turnover on the financial markets, which is lending and borrowing combined, contracted by 14%, after a strong increase in 2011.

The report says this decline is a result of the financial crisis and the extra liquidity available on the European interbank market.

The ECB’s ‘Euro Money Market Survey 2012’ surveyed a panel of 105 banks for their activities and views on the year.

A spokesman said: “The study’s main findings reveal just how much influence the eurozone crisis has had on money markets and the Eurosystem’s special policies for dealing with the debt.

Banks borrowed from ECB

“There is currently excessive liquidity provided by the Eurosystem which reduces demand for interbank funding. Tougher regulatory measures have reduced the supply of unsecured interbank lending.”

One of the main reasons for a downturn in activity is that the banks met their funding targets for 2012 via the long term refinancing operation (LTRO) which means they borrowed money from the ECB and didn’t have to scour money markets for lenders.

The banks surveyed say that in the unsecured market their cash borrowing fell by 38% as lending went down by 31%.

Their deals focused on 30-day or less maturities and overnight transactions added up to two-thirds of borrowing, compared with 73% in 2011.

The survey also revealed that 83% of lending took place overnight, a rolling year rise of 4%.

And there was a slight increase in secured market transactions to 55%, while derivative trading dropped 9%.

Pessimistic forecast

However, the biggest percentage decrease was overnight index swaps, which saw turnover fall by 50%.

But foreign exchange swaps saw turnover rise by 12%.

The report is pessimistic about the future for euro money markets with nearly half of the banks saying they had tightened up their attitudes to risk which had an impact on the euro and this approach will continue to affect activity.

However, the banks are upbeat in their assessment when they say the current contraction in activity will reduce next year until the eurozone economies improve – and with them there will be an upturn in money market activity.

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