Bloomberg News

Dollar Funding Costs Cheapest in Two Weeks After Swap Rate Cut

December 01, 2011

Dec. 1 (Bloomberg) -- The cost for European banks to borrow in dollars fell to the lowest in more than two weeks after central banks led by the Federal Reserve cut the charge for emergency dollar loans.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 118 basis points below the euro interbank offered rate at 1 p.m. in London, from minus 131 basis points yesterday. The gap widened to 162.5 below Euribor yesterday, the most in three years, before the Fed move.

The Fed, the European Central Bank and four other central banks cut the premium banks pay to borrow dollars overnight by half a percentage point to 50 basis points in an effort to contain the euro-area’s debt crisis. Yesterday’s cut in the swap rate, which takes effect Dec. 5, means European banks will pay about 0.60 percent to borrow dollars.

“European banks are struggling in getting U.S. borrowing,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. The swap cut will ease dollar-borrowing conditions until year-end, though money-market stress will return unless the ECB pursues “aggressive” bond buying to reduce regional borrowing costs, he said.

The one-year basis swap was 72 basis points under Euribor, from minus 79 basis points yesterday, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

ECB Deposits

Lenders increased overnight deposits at the ECB to the highest since June 2010. Banks parked 304 billion euros ($410 billion) with the Frankfurt-based ECB yesterday, up from 297 billion euros on Nov. 29. That compares with a year-to-date average of 81 billion euros.

The Euribor-OIS spread, a measure of banks’ reluctance to lend to one another in Europe, was little change at 99 basis points. The spread, which is the difference between the borrowing benchmark and overnight index swaps, is holding near the widest since March 2009.

Three-month Euribor, the rate banks say they pay for three- month loans in euros, fell to 1.469 percent from 1.473 percent yesterday. One-week Euribor dropped to 0.894 percent from 0.904 percent yesterday.

The dollar London interbank offered rate, or Libor, for three-month dollar loans fell for the first time since July 25, dropping to 0.527 percent from 0.529 percent yesterday.

--Editors: Andrew Reierson, Michael Shanahan

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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