Borrowing costs

Russian sanctions increase dollar borrowing costs in funding markets

U.S. dollar banknotes are shown in this illustration taken February 14, 2022. REUTERS/Dado Ruvic/Illustration

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  • Euro currency swaps hit highest level since Match 2020
  • Russian-Ukrainian war spills over to US financial markets

LONDON/NEW YORK, Feb 28 (Reuters) – The cost of raising U.S. dollar funds in the euro swap market rose sharply on Monday after Western countries tightened sanctions on Russia over the weekend , in particular by blocking certain Russian banks from the SWIFT international payments system. .

Three-month euro currency swaps hit 38.25 basis points, the highest since mid-March 2020, the start of the coronavirus pandemic, as banks and foreign companies rushed to secure funding in dollars.

In other words, investors were willing to pay around 38.25 basis points above interbank rates to exchange three-month euros for dollars.

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Last Friday, that three-month cost was 21 basis points and it was 8 basis points a month ago.

Currency swaps allow investors to raise funds in a particular currency from other funding markets. For example, an institution with dollar funding needs can raise euros in the euro funding markets and convert the proceeds into dollar funding obligations via a foreign exchange swap.

“The broadening of the euro-dollar basis is a sign of dollar funding stress for European banks,” said Antoine Bouvet, senior rates strategist at ING.

“There are many question marks surrounding the impact of the sanctions on financial stability, but it seems likely that they will temporarily make dollar funding more expensive for foreign banks.”

The ruble plunged nearly 30% to an all-time low against the dollar on Monday after Western countries unveiled tougher sanctions on Saturday, including blocking some Russian banks from the international payment system SWIFT.

Analysts said the decision by the United States and its allies to block Russia from using $630 billion in central bank foreign exchange reserves over the weekend would make dollar funding costs costly for Western companies that were paid by Russian counterparties. Read more

“If the West is unwilling or unable to lend US dollars and euros to certain Russian entities, it means they are becoming scarce and the cost of liquidity is increasing,” said Kenneth Broux, FX strategist at Societe Generale in London.

“For Western businesses, this means central banks may have to provide liquidity in dollars and euros.”

According to estimates by Credit Suisse’s Zoltan Pozsar, Russia holds about $300 billion in short-term money market instruments: $200 billion in currency swaps and another $100 billion through public and private deposits.

borrowing dollars

Concerns about the Russian-Ukrainian war have filtered into US funding markets.

The spread between the three-month U.S. forward rate agreement and the three-month overnight indexed swap rate, an indicator of funding stress, widened to 18.56 basis points on Monday, its widest since the beginning of July 2020

On an intraday basis, the spread was 23.75 basis points touched early in the morning in the New York session, the highest since May 2020. The higher spread reflects higher interbank lending risk or dollar hoarding.

The FRA-OIS spread measures the difference between the three-month Libor or interbank lending rate and the overnight index rate, or the effective federal funds rate, which is the risk-free rate set by the Reserve. federal.

(This story refiles to remove the MONEY MARKETS tag from the title)

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Reporting by Dhara Ranasinghe, Saikat Chatterjee in London and Gertrude Chavez-Dreyfuss in New York; Editing by John Stonestreet and Jonathan Oatis

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