Interbank lending hit by Greek concerns

A GAUGE of banks’ reluctance to lend to each other in Europe rose for the first time in a week yesterday amid renewed concern Greece is headed for a default.

The Euribor-OIS (TED) spread, the difference between the three- month euro interbank offered rate and overnight index swaps, was at 77.8 basis points at lunchtime yesterday in London, from 75.3 at the end of last week. This is within seven basis points of the highest level since March 2009, which was reached on September 12th.

The International Monetary Fund and European Union are reviewing whether Greece can meet the conditions of its international bailout after a two-day meeting of finance ministers failed to result in new measures to support the region.

Greece’s economy will shrink 5.5 per cent this year and then “notably” in 2012, Greek finance minister Evangelos Venizelos said in Athens yesterday.

The cost for European lenders to fund in dollars was little changed, after the European Central Bank co-ordinated with its counterparts around the world last week to provide unlimited dollar loans until year-end.

The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, was 90.5 basis points below the euro interbank offered rate, from 87.1 basis points on September 16th. The cost was 112.5 basis points under Euribor a week ago, when the swap was the most expensive since December 2008.

The cost of one-year dollar funding climbed, with the cross-currency basis swap for that period at 66 basis points less than Euribor, compared with 64.7 at the end of last week.

The difference widened to 75.2 basis points on September 13th. “The basis swap spread is important as it adds to already substantial bank funding costs,” Philip Gisdakis, a strategist at UniCredit in Munich, wrote in a note. “Although the spread has declined on the back of the ECB intervention, it is still very high.”

Three-month Euribor – the rate banks say they pay for three-month loans in euro – was little changed at 1.536 per cent from 1.535 per cent. The three-month London interbank offered rate, or Libor, in dollars rose to 0.3525 per cent from 0.35133 per cent at the end of last week, according to the British Bankers’ Association – the highest rate since August 16th, 2010. The dollar Libor-OIS spread was little changed at 28.25 basis points. – (Bloomberg)