Concerns over the health of sovereign finances cast a shadow over interbank market sentiment on Monday, even after European banking stress tests revealed few unexpected weak spots in the region's financial sector.
The rates banks charge for lending to each other in the unsecured market continued to include a hefty risk premium despite the release of a raft of information detailing banks' exposures as part of a Europe-wide banking healthcheck.
Markets were focused on the intensifying crisis in the eurozone which is keeping banks' appetite to lend low and rates high as debt problems threaten to envelop Italy and Spain. "As long as the situation in the sovereign space has not been resolved, stress will remain," said BNP Paribas rate strategist Patrick Jacq.
Nevertheless, the gap between Libor interbank fixings and expectations of central bank rates - a measure of counterparty risk - rose, suggesting no let up in the recent high tension stemming from European leaders' failure to address the sovereign debt crisis.
The three-month euro Libor/OIS spread hit 25 bps, the upper end of its recent range, while the dollar equivalent rose to equal its highest since early May at 15 bps.
"The market focus has moved straight to Thursday," Mutkin said, referring to an EU leaders' summit which investors are hoping will provide some clarity on how politicians will rescue Greece and share the burden with private bondholders.
Several key questions remained unanswered over how policymakers would shape a deal to rescue Greece from near collapse under its debt burden, and how to stem the spread of the crisis to Italy and Spain - considered too big to bail out.
With markets looking for clarity on a broad solution, there was scope for fresh disappointment if those expectations were not met.
ECB loans worth 153.6 billion euros will expire this week. Demand was seen likely to remain high at the central bank's regular seven-day tender on Tuesday.
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