Bloomberg News

Cost of Swapping Euro Payments to Dollars Rises, Reversing Fall

October 17, 2011

Oct. 17 (Bloomberg) -- The cost for European banks to convert euro interest payments into dollars rose, reversing a decline, as Germany damped expectations for a fast resolution to the euro region’s debt crisis.

The three-month cross-currency basis swap was 91 basis points under the euro interbank offered rate as of 4:27 p.m. in London, from 90 at the end of last week, according to data compiled by Bloomberg. The swap earlier fell to 87 basis points below Euribor, the smallest gap in a month.

German Chancellor Angela Merkel’s chief spokesman Steffen Seibert said at a briefing in Berlin today that European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit. European Union Economic and Monetary Affairs Commissioner Olli Rehn said earlier that clarity on a strategy will emerge in the “coming days.”

“Given that risk assets are close to the top of recent ranges it probably doesn’t take much in the way of bad news, or even a lack of good news, to trigger weakness,” Roger Francis, a credit analyst at Mizuho International Plc in London, said in an e-mail.

The one-year basis swap was 65 basis points below Euribor from 63 on Oct. 14. 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, was 76 basis points from 74 on Oct. 14. The spread reached 89 basis points on Sept. 23, the widest since March 2009.

ECB Deposits

Overnight deposits at the European Central Bank rose. Banks parked 136 billion euros ($188 billion) at the Frankfurt-based ECB on Oct. 14, up from 123 billion euros on Oct. 13. 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 1.578 percent from 1.574 percent on Oct. 14. One-week Euribor fell to 1.171 percent from 1.174 percent.

The three-month dollar London interbank offered rate, or Libor, rose for the 27th day to 0.406 percent from 0.405 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 little changed at 39 basis points.

--Editors: Andrew Reierson, Cecile Gutscher

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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