Euro rates keep rising despite bank recap plans

Plans to recapitalise Europe's banks did little to cut the cost of unsecured borrowing between institutions on Thursday, with any loosening of conditions seen tied to medium-term progress towards shoring up the financial sector. As part of a package of measure to tackle the eurozone debt crisis, banks will get around 106 billion euros in fresh capital to help accommodate losses on sovereign debt issued by the region's struggling peripheral states.
But while equities and other riskier assets rallied on news of the package, benchmark rates for borrowing between banks showed little movement, rising in line with the recent trend, while measures of counterparty risk eased only slightly. "There is essentially no change in the credit spreads between various European banks," said Chris Clark, analyst at ICAP in London.
Shoring up the banking sector was the most widely anticipated component of the three-pronged deal announced early on Thursday by European leaders, which also covered private sector losses on Greek debt and plans to leverage the region's rescue fund. "Last night was widely expected, I think. The expectation was already being acted on by banks," said Chris Huddleston, head of money markets at Investec in London.
Huddleston said some banks had been aggressively seeking longer-term funding in markets since September, helping to push interbank rates higher. Three-month euro Libor rose to 1.52375 percent, extending the trend in place since late August, while the three-month Euribor rate edged higher to 1.59 percent.
Banking shares rallied on the overnight news, pushing the STOXX Europe 600 banking index up 9 percent and the Markit iTraxx index of senior financial credit default swap prices down 33.42 basis points to its lowest since August. But the easing of broader investors worries over the banking sector was unlikely to translate into freer and cheaper interbank lending in the short term, analysts said. "A lot of the credit spreads arise because of lending limits enforced by individual banks and these sorts of things do not change immediately. Risk committees and the like must first sit down and discuss," said ICAP's Clark.