China Stops FX Swaps With Some European Banks

Asian and other banks have been cutting credit lines and reducing exposure to European banks over the past few months as the threat of a default by Greece looms ever larger. That has sent European banks to the European Central Bank in search of ways around the high cost of dollars and worries about interparty risk that is pervading the interbank lending markets.

A strategist at a Japanese bank in Singapore, who requested anonymity because he is not authorized to speak to the media, was quoted saying, “Bank of China’s move only highlights what has been a general trend in the interbank markets over the past few weeks: namely, some European names are finding it difficult to raise dollars and counterparty confidence in them is evaporating quickly. The selling in Asian credits, local debt, FX are all symptoms of them trying to create dollar funding buffers. While I don’t expect this to have a material impact on their P&Ls, it just underlines how fragile broad market sentiment is.”

While brokers said counterparty concerns had not yet affected trading, thanks to rerouting through willing third parties, they acknowledged that it could eventually take a toll on banks.

One unnamed dealer was quoted commenting about the FX swaps, “With so much bad news coming from Europe, I think more banks will follow suit.”