Benchmark borrowing costs for eurozone banks pushed higher on Friday as lenders, particularly of dollars, remained reluctant to provide any but the shortest maturity funds on fears over borrowers' exposure to eurozone sovereign debt. Implementation risk over a second bailout package for Greece has sent Greek bond yields soaring again. Athens warned it may opt out of a crucial debt swap.
--- Dollar swap costs stabilise
Although some risk indicators are showing signs of stabilising well below levels seen during the 2008 financial crisis after widening sharply in recent weeks, the cost of insuring against bank defaults - as indicated by the iTraxx senior financial CDS index - has soared high above levels seen in early 2009. "Stress tests revealed banks' significant exposures to sovereign risk," said BNP Paribas rate strategist Patrick Jacq.
"As this risk has increased sharply, credit assessment on banks has worsened significantly." That, Jacq said, is a main cause of the widening in the spread of three-month Libor rates over overnight indexed swaps - the Libor/OIS spread. In Europe, that spread has risen five-fold to 60 basis points since early July. But that is well below the near 200 bps seen at the height of the financial crisis and further widening is likely to be limited with the European Central Bank still providing unlimited liquidity to banks.
The dollar equivalent has doubled to around 27 basis points. "Unless there is a significant decrease in banks' CDS - ie reduced concerns about sovereign risk exposure driven by signs of improvement in peripherals - the potential for OIS/BOR spreads to tighten is small," Jacq said.
RBS strategist Simon Peck also highlighted increasing use of the ECB's deposit facility - its highest since February after the central bank handed out 6-month funding earlier this month - and a decline in Eonia overnight trading volumes. Benchmark three-month euro Libor rates edged up to 1.48125 percent, with equivalent dollar rates up a third of a basis point at 0.32278 percent. The three-month euro-dollar cross currency basis swap, which measures the premium banks have to pay to swap euros into dollars, was steady around minus 83 basis points. It was under minus 20 basis points in April.