Bloomberg News

Dollar Funding Costs Rise for a Third Day in Euro Money Markets

December 12, 2011

Dec. 12 (Bloomberg) -- Dollar funding costs rose for a third day in euro money markets as Moody’s Investors Service said it will review ratings for all European Union countries.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 123 basis points below the euro interbank offered rate at 12:57 p.m. in London. The gap has widened from minus 109 since Dec. 8, when policy makers met in Brussels to address the debt crisis.

Europe’s leaders agreed last week to a fiscal accord to tighten budget policies and create automatic penalties for countries violating deficit rules. Moody’s said today the summit offered “few new measures,” prompting it to go ahead with a review of all EU sovereign states first announced in November, which will be completed in the first quarter of next year.

“Almost certainly, a number, if not all of euro-area AAA sovereigns will see a downgrade in the near future,” said Marchel Alexandrovich, an analyst at Jefferies International in London. Banks’ funding costs continue to rise amid investor concerns about “whether the euro will remain in its present form a year from now,” he said.

The one-year basis swap widened to 86 basis points under Euribor from 80 basis points on Dec. 9, 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 slightly. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, was at 95.3 basis points from 95.6 basis points Dec. 9.

Lenders increased overnight deposits at the European Central Bank, parking 335 billion euros ($446 billion) at the Frankfurt-based ECB on Dec. 9, from 310 billion euros the previous day. That’s the most since June 2010 and compares with a year-to-date weekly average of 88 billion euros.

Three-month Euribor, the rate banks say they pay for three- month loans in euros, fell to 1.43 percent from 1.437 percent on Dec. 9. One-week Euribor fell to 0.8 percent from 0.831 percent on Dec. 9.

The dollar London interbank offered rate, or Libor, for three-month dollar loans rose to 0.544 percent from 0.542 percent Dec. 9.

--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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