Bank-to-bank borrowing costs edged up on Friday and are likely to stay high in coming weeks with doubts over progress in the implementation of a new European plan to shore up the financial sector adding to banks' inclination to hoard cash into year-end.
Unsecured lending rates extended their march even as markets bet that the European Central Bank may cut interest rates as soon as at next week's policy meeting, after a batch of downbeat data signalled a slowdown in euro area growth. A surge in Italy's borrowing costs to euro-era highs at an auction of 10-year bonds on Friday also raised questions about the efficacy of the new measures unveiled on Wednesday by eurozone leaders to try and ringfence contagion from Greece's debt problems.
"After the knee-jerk reaction where we saw the risk-on moves after the outcome of the summit, the deal on Greek debt exchange reducing the risk of a hard restructuring might have helped to reduce the money market spreads a bit," said Benjamin Schroeder, a strategist at Commerzbank. Benchmark three-month euro Libor rates were up at a new 12-week high of 1.2688 percent, with equivalent Euribor rising to a fresh 2-1/2 month peak of 1.592 percent despite a heavy overhang of excess cash in the euro banking system.
The excess is a reflection of how reliant some banks - which hold large amounts of sovereign debt - have become on the ECB handouts as the eurozone debt crisis intensified recently. Money markets are also pricing in a 50 percent chance of the ECB cutting its refinancing rate by 25 basis points to 1.25 percent when it meets on Thursday, according to calculations by Barclays Capital. The forecast is little changed from recent weeks.