Euro lending rates steady

Euro interbank lending rates were steady on Wednesday, a day ahead of a European Central Bank meeting expected to approve the provision of unlimited funding to the banking sector at least until year-end. With parts of the eurozone banking system still heavily reliant on the ECB for liquidity, such a move would extend the current promise of mid-October for the central bank's main weekly one-week operations, and beyond September for three-month loans.
Traders said that with an extension widely expected, some banks were bidding less for funds in the interbank market. "Some of the bigger European banks have been reducing the levels they are willing to pay for the shorter end in the fixed dates on speculation that the ECB will extend its fixed rate 3-month tenders until the year end," said ICAP broker Kevin Pearce.
While the across-the-board tension seen in money markets in May at the height of the sovereign debt crisis is absent, some indicators of stress have been rising again, having eased in July when the publication of financial checks gave the European banking sector a mostly clean bill of health.
In terms of individual credit default swaps, Allied Irish Bank's five-year senior CDS is currently 523 basis points, exceeding early July's high of 516 basis points, while Portugal's Banco Espirito Santo's is at 414 bps, up from 300 bps in early August although still a way from this year's high of 635 bps, according to BNP Paribas.
Any hint the ECB has firmed up plans to withdraw lending support would surprise the market and almost certainly push up money market rates. Six-month Euribor could rise to 1.4-1.5 percent in such a case, according to UniCredit. "It's possible that returning to auction now could force some banks to resort to using higher bids to ensure funding, the snowball effect of which may drag rates too far from the (ECB's one percent refinancing) rate to sit comfortably with the Governing Council," ICAP's Pearce said.
The eurozone's economic recovery has been uneven, a trend reflected on Wednesday in data showing overall manufacturing activity in August growing at its slowest pace since February. The 10-year Irish/German government bond spread has hit euro lifetime highs this week, reflecting that and concerns over the cost of bailing out parts of the Irish banking sector.
Benchmark three-month euro Libor rates were unchanged at 0.83 percent, with the spread over overnight indexed swap rates - another stress indicator - at 32 basis points up from around 27 basis points at the start of August. Three-month dollar Libor rates were also unchanged at 0.29563 percent.