Bloomberg News

European Banks’ Dollar Funding Costs Fall Amid Support Optimism

October 05, 2011

Oct. 5 (Bloomberg) -- A measure of how much European banks pay to fund in dollars fell amid speculation policy makers are planning ways of protecting banks from the sovereign crisis.

The one-year cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was at 72 basis points below the euro interbank offered rate as of 5 p.m. in London, down from 75 basis points yesterday. A basis point is 0.01 percentage point.

European Union finance ministers are discussing measures to coordinate the recapitalization of banks, the Financial Times reported. Optimism that policy makers are tackling the crisis offset concern that it’s spreading to Italy, which had its credit rating cut by Moody’s Investors Service for the first time in almost two decades.

“The EU is currently only examining the idea,” Anke Richter, a credit strategist at Mizuho International Plc in London, wrote in a note. “While markets took the headline as a positive, we think the idea will likely go nowhere as it is the wrong solution to the problem.”

The three-month cross-currency basis swap was 106.5 basis points under Euribor, according to data compiled by Bloomberg. The cost was 112.5 basis points below the benchmark on Sept. 12, when the swap was the most expensive since December 2008.

A measure of banks’ reluctance to lend to each other rose. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, was 82 basis points from 79 yesterday. The gap increased to 89 basis points on Sept. 23, the widest since March 2009.

Deposits Rise

Lenders increased overnight deposits at the European Central Bank to the highest in more than a year. Banks parked 213 billion euros ($283 billion) at the Frankfurt-based ECB yesterday, up from 209 billion euros on Oct. 3. That’s the highest since July 2010 and compares with a year-to-date average of 53 billion euros.

The ECB today allotted $500 million to one bidder in a regular seven-day liquidity-providing operation at a fixed rate of 1.09 percent. Last week, the Frankfurt-based ECB also lent $500 million to one institution. The ECB doesn’t identify the banks it lends to.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.558 percent from 1.557 percent yesterday. One-week Euribor fell to 1.17 percent from 1.184 percent.

The three-month dollar London interbank offered rate, or Libor, rose for a 19th day to 0.384 percent from 0.381 percent, according to the British Bankers’ Association. That’s the highest since Aug. 11, 2010.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, was 38.4 basis points, the biggest gap since July 2010.

--With assistance from Christian Vits in Frankfurt. Editors: Andrew Reierson, Michael Shanahan

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net; Daniel Tilles at dtilles@bloomberg.net


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