Bloomberg News

Banks’ Reluctance to Lend to Each Other Falls to Four-Month Low

February 07, 2012

Feb. 7 (Bloomberg) -- A measure of European banks’ reluctance to lend to one another fell to the lowest in more than four months as European policy makers pump funds into the economy, money markets show.

The Euribor-OIS spread, the difference between the borrowing benchmark and overnight indexed swaps, dropped to 74 basis points at 11:40 a.m. in London, the lowest since Oct. 14, according to data compiled by Bloomberg. That compares with 76 yesterday.

Borrowing costs have been driven lower after the European Central Bank gave financial firms a record 489 billion euros ($639 billion) of three-year loans in its so-called longer-term refinancing operation in December. The Frankfurt-based ECB holds a second auction of cheap funding on Feb. 28.

“There’s an expectation that the Euribor-OIS will continue to grind in a bit,” said Roger Francis, an analyst at Mizuho Securities Ltd. in London. “It reflects the easing of tensions in financial markets and comes back to the much-improved funding position of European banks following the ECB’s provision of long-term funds.”

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 70 basis points below the euro interbank offered rate in London, from minus 73 yesterday, data compiled by Bloomberg show. The cost dropped to 69 below Euribor last week, the lowest since Aug. 5.

The one-year basis swap was little changed at minus 60 basis points. A basis point is 0.01 percentage point.

Lenders reduced overnight deposits at the European Central Bank, placing 503 billion euros with the Frankfurt-based ECB yesterday from 511 billion euros on Feb. 3.

Three-month Euribor, the rate banks say they pay for three- month loans in euros, fell to 1.086 percent, from 1.094 percent. One-week Euribor dropped to 0.382 percent from 0.384 percent.

--Editors: Andrew Reierson, Michael Shanahan

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

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


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