MONEY MARKETS-Libor steadies; tensions ease but banks hoarding

Tue Jun 1, 2010 12:28pm EDT

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 * Benchmark euro Libor rates edge higher, dollar steady
 * Market tensions ease, but banks still hoard cash
 * 1-month U.S. T-bill rates down from last week
 (Adds economist's quote, changes dateline)
 By Chris Reese and Kirsten Donovan
 NEW YORK/LONDON, June 1 (Reuters) - Benchmark euro
interbank lending rates edged higher on Tuesday and dollar
rates were steady as money market tensions eased from elevated
levels but banks continued to hoard what funds they could get.
 Money markets had appeared pressured over the last couple
of weeks -- illustrated by a scramble for dollar funds -- over
fears that international lenders were becoming reluctant to
invest in the euro zone as a sovereign debt crisis there
spiraled.
 One key indicator of stress, the forward September 3-month
Libor/OIS spread fell to around 60 basis points, according to
ICAP data, from around 68 basis points a week ago, while the
three-month euro/dollar cross currency swap was at -55 basis
points from its recent lows of -70 basis points ICAB4.
 But analysts said there was still a reluctance to lend
dollars to many European banks.
 "It's looking healthier than this time last week, but
Europe is still very much left on the top shelf," said a dollar
trader.
 Banks were paying around 1 percent to swap euros into
dollars, the trader said, well above Tuesday's benchmark dollar
Libor fixing USD3MFSR= of 0.53625 percent, but still around
quarter of a percent below rates currently being charged by the
European Central Bank's and Federal Reserve's swap facility.
 Dollar Libor has been rising steadily since early March
along with worries over the outcome of the euro zone debt
crisis. Late last week the fixing reached a recent high of
0.53844, which was the loftiest in nearly a year.
 "Funding pressures are escalating again in the global
banking sector as contagion risks intensify," said David
Rosenberg, chief economist and strategist at money management
firm Gluskin Scheff in Toronto.
 The desire for safe-haven, short-term U.S. debt on Tuesday
pressured one-month Treasury bill rates lower, down to 0.147
percent from 0.157 percent late on Friday, according to Reuters
data. U.S. markets were closed on Monday for the Memorial Day
holiday.
 Relative calm toward the end of last week allowed a
cautious reopening of credit markets for banks raising funds,
with Deutsche Bank launching the first senior bank deal since
April 15.
 European banks continue to hoard cash however, with around
280 billion euros of excess liquidity in the system and
overnight deposits at the ECB hitting record highs on Friday.
 Banks took almost 118 billion euros at the ECB's regular
one-week tender on Tuesday, up from a maturing amount of 106
billion euros [ID:nECB000014], the sixth week the amount has
risen, Morgan Stanley said.
 The ECB on Monday acknowledged in a report that euro zone
debt tensions may force it to delay a phasing-out of cheap
lending operations designed to help banks through the financial
crisis.  [ID:nLDE64U0OS]
 It also warned that euro zone banks face up to 195 billion
euros in a "second wave" of potential loan losses over the next
18 months due to the financial crisis.
 "The problems in the banking sector and the anticipation of
write-downs are not new," said Societe Generale economist James
Nixon. "But in the current environment it is not helpful to be
reminded of these problems."
 Benchmark euro Libor rates EUR3MFSR= were a third of a
basis point higher at 0.63688 percent.
 (Editing by Kenneth Barry)


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