MONEY MARKETS-Strains remain high with no fresh debt plan

Mon Nov 21, 2011 10:17am EST

* Moody's adds to concerns crisis threatening France

* Euro interest rate swap spread at widest since end-2008

* Euro-priced interbank rates rise despite liquidity glut

* French banks' borrowing at ECB tops 100 bln euros

By Emelia Sithole-Matarise

LONDON, Nov 21 (Reuters) - Money markets remained under pressure on Monday, with an emphatic victory for Spanish conservatives committed to tough austerity doing little to ease fears the euro zone debt crisis was spinning out of control.

Adding to market fears that Europe's third biggest economy is being drawn into the debt storm, Moody's warned France that a sustained rise in its debt yields and weakening economic growth could be negative for its triple-A credit rating.

French bank shares fell, while French government debt yields and the cost of insuring its debt against default rose along with those of Spain and other peripheral euro zone issuers, spurring flight into the perceived safety of German bonds.

Demand for top-rated German paper was also evident in moves in general collateral, with the one-year borrowing cost of using German government debt near lows seen at least in July 2009 around 0.26 percent, according to ICAP data.

This was almost 50 basis points below the ECB's deposit rate which normally forms a floor for such rates. French one-year general collateral was around 0.39 percent while that for Italy was at 1.8 percent.

Short-term euro interest rate swap spreads -- a key measure of risk aversion -- was at its highest since the 2008 financial crisis at around 114 bps. The equivalent U.S. swap spread was also near its highest levels since June 2010 at around 51 bps.

The European Central Bank has been buying bonds in the secondary market to rein in borrowing costs for struggling sovereigns but pressure on it to take more sweeping action such as being the lender of last resort is growing.

It showed no sign of doing so on Monday, however, with data showing it restricted its purchases of troubled euro zone government debt to 8 billion euros last week.

Germany opposes full-blown ECB intervention in the crisis, leaving it at odds with some European partners and Britain.

"Everything is now concentrated on the core. What will happen to France? ... Would the Germans come round to some ECB-inspired solution? That is where everyone is looking," said ICAP analyst Chris Clark.

"The risk-off move is firmly on. In the current environment, with the massive uncertainty that markets are facing coupled with the extremely tough trading conditions, that means for most people to stay flat is an objective."

FRENCH BANKS UP ECB BORROWING

In the unsecured market, euro-priced interbank lending rates rose, with no new measures to tackle a crisis entering its third year outweighing the impact of a liquidity glut from the ECB.

Data showed France's banks, heavily exposed to the euro zone's lower-rated government debt, borrowed more than 100 billion euros from the ECB last month, up around 20 billion euros from the previous month.

Banks are now borrowing just short of 500 billion euros from the ECB but data show almost two-thirds of that money is being deposited back at the central bank. That proportion compares with around one third after Lehman Brothers' collapse back in 2008.

The premium for swapping euros into dollars also pushed higher, with the three-month cross-currency basis swap around four basis points wider at -139.500 basis points, the most since the 2008 financial crisis.

Some analysts say the cost of borrowing three-month dollars in the market is now equal if not slightly more than that of borrowing from the ECB, which could see a surge in demand at the central bank's final tender of 84-day dollar funds in December

Interbank lending rates also reflected investor reluctance to part with cash, with three-month dollar Libor rates marching higher for a 101th consecutive session, fixing almost a full basis point up at 0.49500 percent. The rate has doubled from 0.24 percent in July.

"Libor rates still reflect the credit stress in the banking system -- above all in Europe," BBVA strategist Pablo Zaragoza said. "We see limited downside for rates in the short-term, but further upside could be capped around 0.55-0.60 percent for 3-month (Libor)."

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

A tourist takes a plunge as she swims at Ngapali Beach, a popular tourist site, in the Thandwe township of the Rakhine state, October 6, 2013. Picture taken October 6, 2013. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY) - RTR3FOI0

Where do you want to go?

We look at when to take trips, budget considerations and the popularity of multigenerational family travel.   Video