Bloomberg News

Dollar Funding Costs Rise Most in a Month in Euro Money Markets

December 09, 2011

Dec. 9 (Bloomberg) -- The cost for European banks to borrow in dollars rose the most in a month on concern the measures agreed upon by euro-area leaders won’t be enough to stem the region’s debt crisis.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened nine basis points to 126 basis points below the euro interbank offered rate at 12:30 p.m. in London. That’s the most expensive rate since Dec. 2.

Europe’s leaders said today its permanent rescue fund won’t get a banking license that would enable it to increase its firepower by borrowing from the European Central Bank. Regional leaders added 200 billion euros ($267 billion) to the rescue fund and tightened anti-deficit rules.

The rescue fund was “not enough” and should be enlarged, said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. Rising dollar-borrowing costs reflect investors’ disappointment that today’s accord is “short in details,” he said.

The one-year basis swap widened to 78 basis points under Euribor from 73 basis points yesterday, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

Banks’ Reluctance

A measure of banks’ reluctance to lend to one another in Europe fell after the ECB cut interest rate by 25 basis points to 1 percent yesterday. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, was 96 basis points from 100 basis points yesterday.

Lenders reduced overnight deposits at the ECB, parking 310 billion euros at the Frankfurt-based central bank yesterday, from 324 billion euros on Dec. 7. That compares with a year-to- date weekly average of 87 billion euros.

Three-month Euribor, the rate banks say they pay for three- month loans in euros, fell to 1.437 percent from 1.47 percent yesterday. One-week Euribor fell to 0.831 percent from 0.887 percent yesterday.

The dollar London interbank offered rate, or Libor, for three-month dollar loans rose to 0.542 percent from 0.54 yesterday.

The premium for the overnight rate lenders are prepared to pay for unsecured three-month funding using the forward market rose to the highest in three years. The so-called FRA-OIS spread widened 1.3 basis points to 96.3 basis points, the most since December 2008.

“There’s quite a lot of pressure on the market as we go into year-end,” said Peter Chatwell, a strategist at Credit Agricole CIB in London. “Looking for sentiment to turn right now is a bit of a push. Spreads should tighten a bit but now is the wrong time for that to happen.”

--With assistance from John Glover in London. 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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