Interbank dollar borrowing costs inched up again on Monday as apprehension about the ability of European policymakers to draw a line under the sovereign debt crisis at summits this week made banks wary of lending to each other. In a sign of market nervousness, investors paid to put their money into triple-A-rated Dutch treasury bills and accepted almost no return on German equivalents at auctions.
Banks also preferred to park about 333 billion euros with the European Central Bank overnight rather than lend it on. Friday's EU summit is seen by some as make-or-break for the eurozone after a string of measures by European leaders over nearly two years failed to stop bond market contagion spreading from Greece to Ireland, Portugal and now Italy and Spain. "There's still risks embedded in the balance sheet of banks and people are worried about their refinancing profile especially next year...The source of the crisis has not been solved yet," ING strategist Alessandro Giansanti said.
"We saw an improvement in dollar rates, in euro dollar basis swap rates last week but I don't think we will get back to July 2011 levels. As long as markets don't see a durable solution to the crisis they will remain elevated." Money market strains eased last week after the Federal Reserve and other major global central banks moved to let foreign banks borrow dollars at a lower interest rate but the respite was limited with interbank costs edging up on Friday.
London interbank offered rates for three-month dollars rose to 0.53390 percent from 0.52833 percent, with Credit Suisse and UBS among the banks indicating higher rates at Monday's fixings. The exit of Canada's Bank of Nova Scotia from the panel of banks that contributes to dollar Libor had limited impact on the fixings. The Bank of Nova Scotia was one of the banks which offered the lowest quotes and it was dropped with effect from Monday after a regular review last Friday by the British Bankers' Association committee that oversees Libor.
The joint action by central banks last week to make dollar funding cheaper could see banks take up a modest $10 billion from the ECB's three-month dollar tender on Wednesday, according to a Reuters' poll of traders on Monday. The total borrowed from the dollar swap lines - both seven-day loans introduced in May 2010 and the three-month tender reintroduced in mid-September is about $2.1 billion.
Demand at the three-month tender may be smaller than expected because of a decline in external liabilities of eurozone banks, the stigma still associated with borrowing from the ECB and a lack of eligible collateral among banks needing dollar funding, Barclays Capital strategists said in a note.
Banks' appetite for euros is expected to slacken slightly at the ECB's weekly tender on Tuesday, given expectations the bank will offer more liquidity with longer maturities at its policy meeting on Thursday. "While more aggressive, these measures continue to represent further liquidity solutions to what remains a solvency problem," Rabobank strategist Richard McGuire said.