NEW YORK: Euro zone interbank lending rates reached their highest levels in more than two months on Friday ahead of the European Union's crucial summit on the euro zone debt crisis this weekend.
Money markets are keen for details on how policy makers will decide to boost the capital of European banks and leverage the euro zone's rescue fund to try to restore confidence in the region's struggling banking sector.
Euro zone finance ministers approved the payment of its sixth tranche aid, of 8 billion euros ($11 billion), under Greece's EU/IMF bailout program on Friday, pending approval from the International Monetary Fund.
Officials also discussed how to boost the effectiveness of the European Financial Stability Facility, the bailout fund, and contain the debt crisis in Greece.
The Federal Reserve's influential vice chair, Janet Yellen, said on Friday that Europe's financial crisis threatened to spill over into the United States, potentially by forcing anxious banks to tighten credit at a time when the economic recovery remains tenuous. On Friday, the Libor three-month dollar rate fixed at 0.41833 percent versus 0.41556 percent on Thursday.
The Libor three-month sterling rate fixed at 0.97856 percent versus 0.97406 percent on Thursday.
The Libor three-month euro rate fixed at 1.51813 percent versus 1.51438 percent on Thursday, according to the British Bankers Association.
Reuters data showed the three-month dollar Libor/OIS spread widened to 33 basis points from 32 basis points.
The spread of three-month Libor rates over three-month OIS rates expresses the three-month premium paid over anticipated central bank rates, or overnight index swap rates.
The spread between three-month euro Libor rates and overnight indexed swap rates stood at 67 basis points, up from 66 basis points in the previous session, and up from around 11 basis points in June.
The three-month sterling Libor/OIS spread was steady at 43 basis points.
Eurodollar futures contracts suggest three-month dollar Libor will hit 0.50 percentage point by year-end.
LIQUIDITY SHOULD CUSHION PRESSURES
Should the outcome of the euro zone debt summit disappoint, the impact on money markets would be offset by expectations for more liquidity coming into the financial system.
The European Central Bank will hold its first one-year tender in almost two years on Wednesday, in which European banks are seen taking up 60 billion euros, according to a Reuters poll published this week.
The forecasts for the poll were wide ranging, underscoring the extreme uncertainty over European banks' funding needs.
Analysts said the extra liquidity coming into the system could ease pressure on key measures of financial stress.
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