Money markets: Dollar funding costs elevated

Dollar funding costs for eurozone banks remained elevated on Monday after ministers delayed the granting of emergency loans to Greece but the stress was not such that banks were seen needing to turn to the ECB for the US currency. Sunday's meeting of Eurogroup finance ministers had been expected to agree to provide Greece the funding it needs to avoid a near-term default, but ministers postponed a final decision pending confirmation that Athens could muster political approval for tough new austerity measures.
Markets are worried that a Greek default or debt restructuring will severely impact the eurozone's banking system with financial institutions large holders of the paper. The one-year euro/dollar currency basis swap spread, which expands when banks become less willing to supply dollars to each other, widened to 30 basis points, a basis point above levels seen on Friday.
But that was in from last Thursday's 37 bps, the widest level in four months, and still well below the 60 basis points seen when Greece first needed a bailout in May 2010. And two-year US swap spreads - a classic indicator of pressure in financial markets - held around 25 basis points, compared with around 20 basis points a week ago. "There's a lack of interest from the biggest providers of dollar funds into the European market," said one trader.
Moody's said last week it might cut the credit ratings of some French banks due to Greek debt exposure. According to Commerzbank calculations, there is currently around a 65 bps premium to borrow dollars from the ECB rather than the market. Average current account holdings versus requirements are currently running at about 30 billion euros, below the 35 billion euros seen at the same point in May's maintenance period but above the roughly 25 billion euros in March and April, according to Reuters data. Benchmark three-month euro Libor rates fixed almost a basis point higher at 1.45938 percent.