NEW YORK/LONDON: Uncertainty about Greece's future in the euro nudged some indicators of money market stress higher on Wednesday, though still far short of last year's levels in a banking system saturated with central bank cash.
Worries have intensified over Greece as it heads towards a new election next month that could hand power to leftists opposed to terms of an international bailout. Another growing concern is the possible cost of fixing Spain's banking system.
The concern over Greece was amplified on Wednesday when central banking sources said the European Central Bank has stopped lending to some Greek banks because they had not been successfully recapitalized. The sources did not name the banks but said they have to go to the Bank of Greece for emergency liquidity assistance.
Three month euro/dollar cross currency basis swaps , which show the rate charged when swapping euro interest rate payments on an underlying asset into dollars, have widened to minus 54 basis points from around minus 46 bps in early May - its best level in nine months.
The measure, which shows funding stress when investors compete for dollars, is expected to move wider in coming days but analysts say it is unlikely to get close to November's minus 167.5 when investors feared another credit crunch.
"Money markets are protected by the ECB's LTROs and the dollar swap lines," said Giuseppe Maraffino, a strategist with Barclays Capital in London.
The European Central Bank's Long Term Refinancing Operations have given banks about 1 trillion euros in long term loans. Swap lines were set up between the US Federal Reserve, the ECB and other major central banks to avert a repeat of the finiancial crisis that followed Lehman Brothers' collapse in 2008.
One trader said the swap lines meant the cost of buying dollars would be kept under control in capital markets after the central banks cut the cost of the loans.
The difference between forward rate agreements (FRA) and Eonia rates - a gauge of credit risk - has also widened across the curve this week, prompting a sell-off in Euribor futures.
The deterioration in the euro zone debt crisis has also fostered expectations in the markets that the ECB will cut interest rates by 25 basis points to 0.75 percent by the end of this year to protect the economy.
Three-month dollar London Interbank Offered Rates (Libor) fixed at 0.46685 percent on Wednesday, up from 0.46585 percent on Tuesday.
Dollar Libor rates have been holding relatively steady since mid-April, after dipping from the recent high near 0.58 percent at the beginning of the year.