LONDON: Euro interbank rates rose on Thursday, driven by low liquidity and rising interest rates, but with no sign of increased stress despite fierce speculation that Greece could restructure its government debt.
While the euro London interbank offered rate (Libor) for three-month funds hit its highest since early May 2009, the spread between Libor and central bank interest rate expectations, which is used as a measure of counterparty risk, remained relatively constant.
Despite the turmoil in government debt markets, where Greek bonds are changing hands at huge discounts amid fears of a cut in their face value, interbank lending showed little sign of seizing up in the way seen during previous periods of sovereign bond stress.
"The interbank market was previously subject to stress because there were perceived solvency issues -- you didn't lend to other banks because you didn't know whether they could pay the money back," said ICAP analyst Chris Clark.
"People don't see that risk any more. Banks have spent a long time recapitalising and although they might have their balance sheet hit, the point is that they're not going to suddenly disappear and become unable to cover their liabilities."
Speculation that Greece could restructure its debt -- with holders of Greek debt being asked to accept lower coupon payments, wait longer to have their funds returned or, in the most severe case, face a haircut on their investment -- did not yet present a systemic risk to the banking sector, analysts said.
"There are some guys out there still with an exposure to Greece, but probably the market is assuming it's not huge and will not dramatically affect counterparty risk," said Luca Cazzulani, strategist at Unicredit in Milan.
Timing was also a factor behind the sanguine approach taken by money market participants. With most interbank lending occurring on a very short-term basis, and many believing a Greek restructuring was likely but not imminent, there was little need to raise lending rates or cut short-term credit lines.
POLICY BACKING
Markets were also showing a degree of confidence that any action taken on Greek debt would be coordinated with steps from policymakers to ensure that access to liquidity was not compromised, analysts said.
"There is a deep need to study all the implications so that the authorities can set up measures that will avoid the restructuring being a huge shock to the entire economy," Unicredit's Cazzulani said.
One of the key issues that did represent a risk to the banking sector, and would need to be addressed in the event of any form of restructuring, was the eligibility of Greek bonds as collateral at the European Central Bank.
This was particularly true for domestic banks whose access to the interbank market remains severely impaired and who are largely dependent on using Greek government bonds as collateral to secure liquidity from the ECB, analysts said.
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