Money market conditions tightened on Monday as mounting worries about a potential Greek default and signs of trouble at Franco-Belgian bank Dexia deepened concerns about the health of the eurozone financial sector. Bank-to-bank rose as the stress in money markets overshadowed hopes the European borrowing costs Central Bank will unveil further liquidity measures and a possible 25 basis point rate cut at its policy meeting on Thursday.
Athens rattled financial markets after it said it will miss a deficit target set just months ago under a massive rescue package, showing even drastic steps may not be enough to avoid bankruptcy. The three-month euro/dollar cross currency basis swap, which falls when dollars are harder to find, was last quoted at minus 115 basis points, its worst since December 2008. The swap has unwound most of the improvements made since major central banks reintroduced three-month dollar tenders earlier last month to ease dollar funding strains.
The London interbank offered rate for three-month dollars,, a benchmark rate for unsecured interbank lending set by a panel of 19 banks, fixed at a fresh 13-month high at 0.37761 percent. French bank Credit Agricole, continued to indicate the highest cost of borrowing among the panel, at 0.44 percent.
Euro-priced interbank rates also rose, with three-month Libor at 1.49750 percent from 1.49500 while the equivalent Euribor rate climbed to its highest level in a month at 1.557 percent - despite the prospect of additional cheap money coming down the pipe from the ECB. Banks took 208 billion euros in one-week funds last week, the highest volume since early February, plus a meaty 140 billion euros in three-month funding. Markets also still see a chance of a rate reduction, though traders have cut bets of a more aggressive easing than 25 basis points after eurozone inflation came in above forecast and well ahead of the ECB's target at 3 percent.