NEW YORK/LONDON: Concern over the outlook for Europe's debt crisis on Friday pushed US-dollar denominated interbank lending rates up for an eleventh consecutive session to the highest in two-and-a-half years.
Key European interbank lending rates dropped on Friday, however, as banks received almost half a trillion euros in the European Central Bank's first-ever injection of 3-year liquidity.
US dollar-denominated three-month London Interbank Offered Rates (Libor) fixed on Friday at 0.57575 percent, the highest since early July 2009, compared with 0.57375 percent on Thursday.
Nervousness that European bank failures could spur another global credit crisis has reinforced bank reluctance to borrow to each other and driven the lending rates higher.
"The first and foremost headwind is the European crisis," said Sean Incremona, economist at 4Cast Ltd in New York.
"There is no easy solution. Fitch (ratings agency) described the situation best by saying, 'a solution to the European crisis is technically and politically beyond reach,'" Incremona said.
However, European lenders took some heart from the ECB allotment of 489 billion euros to euro-zone banks earlier this week. The move was the first of two opportunities to get the 3-year money, and banks receive the funds on Friday.
It is the ECB's latest and most dramatic attempt so far to bolster banks' finances, in a move it hopes will minimize the chances of banks responding to the euro-zone turmoil by slamming the brakes on lending.
Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest-rate expectations and banks' appetite for lending, fell to 1.404 percent from 1.410 percent as a flood of new cash entered the financial system.
Longer-term rates also fell. Six-month rates ticked down to 1.658 percent from 1.662 percent, while 12-month rates eased to 1.988 percent from 1.995 percent.
Shorter-term one-week rates - most heavily influenced by excess liquidity, which jumped to 483 billion euros, according to Reuters calculations - fell to 0.853 percent from 0.861 percent.
The benchmark London interbank borrowing rate (Libor) for euros also eased, falling half a basis point to 1.33429 percent. The equivalent dollar rate crept higher to 0.57575 percent, reflecting the continued difficulties facing European banks in securing dollar funding from the market.
Overnight rates fell to 0.509 percent from to 0.611 percent.
The recent intensification of the euro zone's debt crisis has left a growing pack of banks virtually locked out of open funding markets and reliant on the ECB.
On Thursday, the European Systemic Risk Board said the dangers facing Europe's financial system had continued to worsen over the last three months.
In response, the ECB has already reinstated some of its most potent crisis-fighting tools.
But banks still appear to distrust each other and prefer to deposit their money at the ECB's overnight facility than lend to each other. Latest figures show banks deposited 347 billion euros at the central bank. Emergency overnight borrowing also remained high at above 6 billion euros.
Copyright Reuters, 2011
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