NEW YORK: The cost to borrow dollars rose on Monday as investors charged higher premiums from banks and bond dealers for short-term loans on contagion worries about Spain's bank troubles and Greece's possible exit from the euro zone.
Amid growing concern about Europe's debt crisis, top finance officials and policy-makers leaders of the Group of Seven industrialized nations will hold a conference call early Tuesday, a Canadian government spokeswoman said.
Adding to investor worries has been the expected Moody's downgrades of global investment banks, which rely on repurchase agreements and other short-term funding to finance their trades and operations. Moody's downgrades of these banks are expected by the end of June.
Friday's disappointing data from United States and China reinforced the view the world's two biggest economies are being dragging down from the fiscal woes hurting the euro zone.
"It definitely feels like last year. There are a lot of event risks. Now you have China, and the US is having problems too," said Mike Lin, director of US funding at TD Securities in New York.
Over the weekend, Spanish Prime Minister Mariano Rajoy called for the euro zone to set up a new fiscal authority to manage the bloc's finances, while German Chancellor Angela Merkel pressed for tighter fiscal integration among bloc members.
These remarks revealed some willingness among euro zone leaders to work toward a long-term solution to improve a fiscal framework for the region, but they offered little immediate relief for cash-strapped Greece and Spain, analysts said.
Greece's political turmoil and worries about the Spanish banking system needing a bailout have lifted the interest rates on overnight repurchase agreements 15 basis points since mid-April.
In the current climate of rock bottom, long-term investment returns, rising short-term borrowing costs are cutting into the profits of banks and bond dealers.
In the $1.6 trillion tri-party repo market, interest rates on overnight loans was last quoted at 0.24 percent, unchanged from late Friday. Overnight repos secured by US government debt traded as high as 0.26 percent earlier, traders said.
The overnight repo rate was roughly 5 basis points from the year's high, according to Reuters data.
In unsecured lending, trading was light. Money market funds and other investors showed appetite primarily in commercial paper, certificates of deposits and other short-term debt with maturities of a month or less, analysts said.
There has been little unsecured activities among French and German banks in the second quarter since a modest revival in the first three months of the year, analysts said.
Even investor demand for short-term debt from Japanese banks might be waning. The three-month rates on top Japanese bank CP and CDs were quoted at 0.35 percent on Monday, up from 0.34 percent late on Friday.
Many investors had scooped up Japanese bank dollar-denominated paper on their perceived soundness and safety, pushing down their rates.
Meanwhile, the three-month rates on dollar-denominated debt from Canadian and Australian banks, which has also been favored among risk-averse investors, was quoted at 0.20 to 0.22 percent, flat from late last week, analysts said.
In the derivatives market, Eurodollar futures fell after some rallied to contract highs on Friday. The December 2012 Eurodollar contract fell 4.5 basis points to 99.095 after setting a contract high at 99.195 on Friday.
A fall in Eurodollar futures implied a rise in future costs on interbank borrowing costs for three-month dollars.
There were no fixings London interbank offered rates on sterling or dollar on Monday because of a market holiday in the United Kingdom.
On Friday, the three-month dollar Libor was fixed at 0.46785 percent, rising for the first time since May 16.
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