Money markets: Greek restructuring worries hang over banks

The cost of insuring against eurozone bank defaults rose on Monday on concern over exposure to Greek debt in the event of a restructuring, although some analysts said banks might be able to avoid significant damage. A report in a Greek daily - later denied by Athens - said Greece told the International Monetary Fund and the European Union that it wants to restructure its debt. That fuelled further stress in markets after last week's suggestion by Germany that it may support such a move.
The iTraxx index of senior financial credit default swaps was 4 basis points wider at 136 bps, led by banks in the eurozone's periphery. European banks have around $154 billion of exposure to Greece, according to data from the Bank for International Settlements (BIS). "The scale is still significant enough for politicians to think twice about creating a capital shortfall around the European banking system," Deutsche Bank strategists said.
Although peripheral eurozone banks are heavily reliant on the European Central Bank for funding, any concerns about bank capital could lead to interbank liquidity drying up on the back of uncertainties about who was holding the debt. However, Societe Generale's head of bank credit research Hank Calenti said a restructuring could be done in such a way as to avoid banks having to book a loss.
Benchmark three-month Libor rates advanced another half a basis point to 1.28688 percent as ECB policymakers talk tough on the need to increase interest rates as inflation pressures mount. Equivalent sterling rates were unchanged ahead of minutes of the Bank of England's March meeting, due for release on Wednesday.