Bloomberg News

Euro Loan Costs Drop Below Dollar Libor for First Time Since ’08

July 20, 2012

The cost of borrowing euros for three months fell below a similar dollar loan measure for the first time since 2008, following official benchmark interest rates and government bond yields lower.

The euro interbank offered rate, or Euribor, for three- month loans fell to a record 0.451 percent, as the London interbank offered rate, or Libor, for three-month dollar loans fell to 0.452 percent. It’s the first time since Jan. 3, 2008 that Euribor has been below Libor.

Euribor, which is derived from a daily survey of 43 lenders for the European Banking Federation, has fallen 19 basis points since the European Central Bank lowered its deposit and refinancing rates in a bid to spur lending. The benchmark has fallen for nine consecutive days since the cut while dollar Libor has been little changed in accordance with the Federal Reserve target rate at 0.25 percent.

“These benchmarks are sensitive to moves in official rates and the recent decline in Euribor is a result of the ECB’s cut in its deposit rate,” said Chris Clark, an interest-rate strategist at ICAP Plc (IAP), the world’s largest interdealer broker. “U.S. dollar Libor, meanwhile, has remained stable, reflecting the Fed’s unchanged target rate.”

Investors are snapping up bonds of the safest sovereigns, in some cases agreeing to pay to lend to the nations. Germany’s two-year note yield fell to minus 0.074 percent on July 18 while Austrian, Swiss and Finnish rates also turned negative this week for the first time.

Euribor Cross

Euribor last fell below Libor on Dec. 18, 2007 and didn’t climb above the London-based rate until January 2008.

Barclays Plc (BARC), the U.K.’s second-largest bank, was fined a record 290 million pounds ($450 million) last month for attempting to rig Libor and Euribor to manage its reputation during the financial crisis and boost earnings before it. At least 12 banks including Deutsche Bank AG (DBK) are being investigated for manipulating Libor.

Euribor-EBF Chief Executive Officer Guido Ravoet regrets the loss of confidence in Euribor following the investigations of rigging, he said in an interview today from Brussels with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Libor is determined by a daily poll carried out on behalf of the British Bankers’ Association that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies.

Euribor Futures

Three-month Euribor may continue to slide, according to futures contracts. The implied rate on the contract expiring in September was little changed at 0.365 percent at 12 p.m. in London.

The euro overnight index average, or Eonia, was set at 12 basis points yesterday from 11.9 basis points on July 18. The measure of overnight unsecured lending in the interbank market declined for four days after the ECB’s deposit rate cut took effect.

“Euribor is unlikely to fall much further in the coming weeks, given that Eonia now appears to have found a base following the recent ECB rate cut,” said Clark, whose firm is among those regulators are investigating for Libor manipulation.

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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