Bloomberg News

Dollar Funding Costs at ‘08 Levels Flag Sustained Credit Crunch

November 29, 2011

Nov. 29 (Bloomberg) -- The cost for European banks to fund in dollars rose to the highest level since October 2008 for a fifth day, indicating a longer-lasting credit crunch than that following the collapse of Lehman Brothers Holdings Inc.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 154 basis points below the euro interbank offered rate at 1:40 p.m. in London, from minus 149 basis points yesterday. The gap has widened from as little as minus 8 basis points on May 4.

Euro-area finance chiefs meeting today in Brussels are under pressure to contain the region’s two-year debt crisis that threatens global economic growth. The Organization for Economic Cooperation and Development lowered its global growth forecast yesterday for this year and next, citing Europe’s debt crisis as the main threat.

Banks face more sustained funding pressure compared with 2008, because investors “are panicking about the exposure to sovereign debt and any fallout from a potential breakup of the euro,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “Until the political mess is resolved and there is clarity on the future of the euro, banks are going to be shrinking their balance sheets, hitting economic growth in the process,” he said.

The one-year basis swap was at 103 basis points under Euribor, compared with minus 104 basis points yesterday, data compiled by Bloomberg shows. A basis point is 0.01 percentage point.

Euribor-OIS

The Euribor-OIS spread, a measure of banks’ reluctance to lend to one another, rose one basis point to 94 basis points, data compiled by Bloomberg shows. A basis point is 0.01 percentage point. The spread, which is the difference between the borrowing benchmark and overnight index swaps, was at 98 basis points on Nov. 3, the widest since March 2009.

Lenders increased overnight deposits at the European Central Bank, placing 281 billion euros ($375 billion) with the Frankfurt-based ECB yesterday, up from 256 billion euros on Nov. 25.

Three-month Euribor, the rate banks say they pay for three- month loans in euros, was unchanged from yesterday at 1.477 percent. One-week Euribor fell to 0.905 percent from 0.909 percent yesterday.

The dollar London interbank offered rate, or Libor, for three-month dollar loans rose to 0.527 percent from 0.523 percent yesterday.

--Editors: Andrew Reierson, Paul Armstrong

To contact the reporter on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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