Bloomberg News

Cost of Swapping Euro Payments to Dollars Falls to 3-Week Low

October 11, 2011

Oct. 11 (Bloomberg) -- A measure of how much European banks pay to fund in dollars declined to the lowest in more than three weeks as lawmakers in Slovakia vote on the euro area’s enhanced bailout fund.

The one-year cross-currency basis swap, the rate banks pay to convert euro payments into dollars, fell to 66 basis points below the euro interbank offered rate as of 4:39 p.m. in London, from 67.5 yesterday, according to data compiled by Bloomberg. That’s the smallest gap since Sept. 16.

Slovakia’s approval of the revamped European Financial Stability Facility is needed to enact the plan to prevent contagion from the debt crisis that has spread from Greece. European Central Bank President Jean-Claude Trichet warned today that the sovereign crisis has reached a “systemic dimension.”

There is “hope that we are just weeks away from a having comprehensive strategy to recapitalise the banks and restore confidence in Europe,” Colin Tan, a credit analyst at Deutsche Bank AG in Sydney wrote in a note.

The three-month cross-currency basis swap fell to 93 basis points under Euribor, compared with 95 yesterday. A basis point is 0.01 percentage point.

A measure of banks’ reluctance to lend to one another in Europe was little changed. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps was 71 basis points, compared with 89 basis points on Sept. 23 when the rate was the widest since March 2009.

ECB Deposits

Overnight deposits at the European Central Bank increased to the highest in more than a year. Banks parked 269 billion euros ($367 billion) at the Frankfurt-based ECB yesterday, up from 256 billion euros on Oct. 7. That’s the highest since June 2010 and compares with a year-to-date average of 58 billion euros.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.570 percent from 1.567 percent yesterday. One-week Euribor rose to 1.191 percent from 1.185 percent.

The three-month dollar London interbank offered rate, or Libor, rose for a 23rd day to 0.398 percent from 0.394 percent, according to the British Bankers’ Association. That’s the highest since Aug. 10, 2010.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, rose to 39.2 basis points from 39.8.

--Editors: Andrew Reierson, Cecile Gutscher

To contact the reporters on this story: David Goodman in London at dgoodman28@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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