Eonia Mystery Solved? Spike Tracked Greek Bank's Loans

(Bloomberg) -- A sudden spike in the interest rate for overnight loans between European banks may have been the result of excess liquidity injected into the market by Greece’s second-biggest lender at above-average rates, according to two bankers with knowledge of the matter.

National Bank of Greece SA had excess liquidity of around 450 million euros ($535 million) this week, which it loaned to its peers in the country, the people said. While the flood of funds and the increase in interbank lending in Greece is good news, the rates at which borrowers from the country can access funds are still higher than for the rest of the continent, thus pushing up the weighted average of the overnight rates in Europe, one of the people said. A National Bank of Greece spokesman couldn’t be reached for comment.

Eonia, the effective overnight reference rate for the euro, “is computed as a weighted average of all overnight unsecured lending transactions in the interbank market,” according to the European Money Markets Institute. A sudden surge of activity in Greece, where rates are higher, could explain the spike in the weighted average over Wednesday and Thursday. The rate fell by five basis points at Friday’s setting, returning closer to normal levels.

The rate was set at -0.291 percent Friday after jumping 12 basis points in the past two days. Thursday’s fix rose six basis points to -0.241 percent, the highest since March 2016. A move on that scale would normally be justified only by a shift in the European Central Bank’s benchmark rate or by funding stress among the banks.

In this case, it may have been the result of excess liquidity changing hands at higher rates. Salaries that were deposited by Greek civil servants and higher receipts from repurchase agreements provided National Bank of Greece with more liquidity, one of the people said, asking not to be named because the matter is not public. Other Greek banks found the rate offered by National Bank of Greece appealing, thus drawing on the cash, the people said.

The initial jump had spurred speculation that there was an error in the calculation of the benchmark, though the EMMI, which helps compute the rate, quickly ruled that out. The surge in Eonia fix was potentially due to a single institution’s short-term funding requirements, given there’s nothing in ECB liquidity data to suggest stress, Bloomberg rate strategist Tanvir Sandhu wrote in a note.

While the rate at which Eonia is fixed tends to rise at the end of a month or year, that typically happens only on the last trading day. Furthermore, this week’s jumps were much more pronounced than the usual end-of-month spikes.

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