Bloomberg News

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

October 12, 2011

Oct. 12 (Bloomberg) -- A measure of how much European banks pay to fund in dollars declined to the lowest more than three weeks amid investor optimism Europe is tackling its debt crisis.

The one-year cross-currency basis swap, the rate banks pay to convert euro payments into dollars, fell to 63 basis points below the euro interbank offered rate as of 12:47 p.m. in London, from 68 yesterday, according to data compiled by Bloomberg. That’s the smallest gap since Sept. 16.

The European Commission’s Economic and Monetary Affairs Commissioner Olli Rehn said a consensus on resolving Europe’s debt crisis is in the making. Slovakia Finance Minister Ivan Miklos said parliament will probably approve the revamped European Financial Stability Fund this week after failing to adopt it yesterday.

“Slovakia is delaying but not compromising its final decisions on EFSF,” Annalisa Piazza, a fixed-income strategist at Newedge Group SA in London, said in an interview. “A more solid government in Slovakia and some changes in Italy might be good news for the euro area in the medium term.”

The three-month cross-currency basis swap, fell to 91.5 basis points under Euribor from 95 yesterday. A basis point is 0.01 percentage point.

A measure of banks’ reluctance to lend to one another in Europe rose. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, increased to 74 basis points from 71 yesterday. The rate reached 89 basis points on Sept. 23, the widest since March 2009.

ECB Deposits

Overnight deposits at the European Central Bank fell as banks made adjustments to meet their commitments to the so- called maintenance period. Banks parked 62 billion euros ($85 billion) at the Frankfurt-based ECB yesterday, down from 269 billion euros on Oct. 10. That compares with a year-to-date average of 58 billion euros.

Six banks bid for three-month dollar loans from the ECB today, snapping up $1.35 billion in the central bank’s first 84- day dollar tender. The banks will pay a fixed rate of 1.09 percent.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.571 percent from 1.570 percent yesterday. One-week Euribor fell to 1.186 percent from 1.191 percent.

The three-month dollar London interbank offered rate, or Libor, rose for a 24th day to 0.401 percent from 0.398 percent, according to the British Bankers’ Association. That’s the highest since Aug. 9, 2010.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, was unchanged at 39.

--Editors: Andrew Reierson, Michael Shanahan

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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