Money-Market Stress Seen Avoiding Crisis Level on Russia Risk
Gauges of money market stress remain elevated after hitting their highest since 2020, though bank strategists don’t see the turbulence escalating into a full-blown crisis.
While distortions in funding markets have eased since Monday, the cost of converting euro payments into dollars using one-year cross-currency basis swaps is still around the most expensive since March 2020. Traders are weighing the fallout of sanctions on Russia against the backstop from central banks.
“The latest sanctions are felt among banks and in dollar funding markets,” said Christoph Rieger, head of rates research at Commerzbank AG. “Importantly, however, markets are functional at these more expensive levels, seeing the Russian financial market risks as ring-fenced and not as systemic.”
Much of the stress boils down to uncertainty over how important a cog Russia was in the plumbing of the global dollar system. That’s hard to determine, depending on the degree to which they have been providing dollars into currency swap markets, according to Blake Gwinn at Royal Bank of Canada, who doesn’t think they were a major player.
Credit Suisse AG put it at $300 billion, when including currency swaps and foreign bank deposits. The decision to exclude various Russian lenders from the SWIFT messaging system could result in missed payments and giant overdrafts within the international banking system, according to strategist Zoltan Pozsar. Drawing comparisons with the 2008 Lehman Brothers failure, he said central banks should be ready to intervene.