Bloomberg News

European Banks’ Dollar Funding Costs Decline in Money Markets

October 19, 2011

Oct. 19 (Bloomberg) -- The cost for European banks to convert euro interest payments into dollars fell as policy makers prepare to meet on resolving the euro-area’s debt crisis.

The one-year basis swap, the rate banks pay to convert euro payments into dollars, was 66 basis points under the euro interbank offered rate as of 12:22 p.m. in London, from 66.5 yesterday, according to data compiled by Bloomberg.

Europe’s leaders are set to meet Oct. 23 to discuss ways of combating the crisis that’s forced the European Central Bank to prop up Spain and Italy’s bond markets and put France’s top credit rating under pressure. The Guardian newspaper said yesterday Germany and France agreed to boost the area’s rescue fund, while a person with direct knowledge told Bloomberg News no deal has been reached.

“There is some market-friendly news in the Guardian article, but in the medium term it does feel that a lot rests on whether France can keep its AAA and market confidence for ring- fencing Spain and Italy to be successful,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors today.

The three-month cross-currency basis swap is 91 basis points below Euribor from 90.5 yesterday. A basis point is 0.01 percentage point.

A measure of banks reluctance to lend to one another in Europe fell. The Euribor-OIS spread, the difference between Euribor and overnight index swaps, was 74 basis points from 76 yesterday. That compares with 89 basis points on Sept. 23, when the measure was its widest since March 2009.

ECB Deposits

Overnight deposits at the European Central Bank rose. Banks parked 172 billion euros ($237 billion) at the Frankfurt-based ECB yesterday, up from 165 billion euros on Oct. 17. That compares with a year-to-date average of 60 billion euros.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.582 percent from 1.579 percent yesterday. One-week Euribor fell to 1.161 percent from 1.166 percent.

The three-month dollar London interbank offered rate, or Libor, rose for the 29th day to 0.412 percent from 0.409 percent, according to the British Bankers’ Association. That’s the highest since Aug. 5, 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, 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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