Bloomberg News

Cost of Swapping Euro Payments to Dollars Falls to 1-Month Low

October 14, 2011

Oct. 14 (Bloomberg) -- A measure of how much European banks pay to fund in dollars declined to the lowest in a month as Group of 20 finance ministers began discussions on the euro- region debt crisis.

The one-year cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 63 basis points below the euro interbank offered rate as of 4:20 p.m. in London, from 66 yesterday, according to data compiled by Bloomberg. That’s the smallest gap since Sept. 15.

European officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases as key planks in a revamped strategy to combat the debt crisis, people familiar with the discussions said. The elements of the plan emerged as finance ministers and central bankers from the G-20 met in Paris.

“It’s encouraging that European leaders are starting to understand the need for much aggressive action,” Colin Tan, a credit analyst at Deutsche Bank AG in Sydney, wrote in a note. “But markets will want to see more details as we start to get closer to the big announcement.”

The three-month cross-currency basis swap was 88.5 basis points under Euribor from minus 91 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 74.5 basis points. The rate reached 89 basis points on Sept. 23, the widest since March 2009.

ECB Deposits

Overnight deposits at the European Central Bank rose. Banks parked 123 billion euros ($170 billion) at the Frankfurt-based ECB yesterday, up from 105 billion euros on Oct. 12. That compares with a year-to-date average of 59 billion euros.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.574 percent from 1.572 percent yesterday. One-week Euribor fell to 1.174 percent from 1.181 percent.

The three-month dollar London interbank offered rate, or Libor, rose for a 26th day to 0.405 percent from 0.403 percent, according to the British Bankers’ Association. That’s the highest since Aug. 6, 2010.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, was 38 basis points.

--Editors: Andrew Reierson, Michael Shanahan

To contact the reporter 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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