Bloomberg News

European Banks’ Dollar Funding Costs Rise Amid Europe Divisions

October 20, 2011

Oct. 20 (Bloomberg) -- The cost for European banks to fund in dollars rose as European leaders prepare for a summit to resolve the region’s debt crisis.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 92 basis points below the euro interbank offered rate as of 4:15 a.m. in London, from 90.5 yesterday, according to data compiled by Bloomberg.

Draft documents detailing plans to enhance Europe’s bailout fund prompted criticism from some German lawmakers who have opposed bailout aid. The guidelines for a revamped euro-area bailout fund showed it may provide credit lines for indebted countries. Finance ministers gather in Brussels tomorrow to set a common strategy, with leaders scheduled to meet Oct. 23.

The one-year basis swap was 67 basis points under Euribor from 66 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, held at 75 basis points. The rate reached 89 basis points on Sept. 23, the widest since March 2009.

Overnight Deposits

Overnight deposits at the European Central Bank rose. Banks parked 182 billion euros ($249 billion) at the Frankfurt-based ECB yesterday, up from 172 billion euros on Oct. 18. That compares with a year-to-date average of 61 billion euros.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.584 percent from 1.582 percent yesterday. One-week Euribor fell to 1.158 percent from 1.161 percent.

The three-month dollar London interbank offered rate, or Libor, rose for the 30th day to 0.416 percent from 0.412 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, rose to 40 basis points from 39 yesterday.

--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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