Fears that the eurozone debt crisis could evolve into a banking sector meltdown is making investors increasingly anxious about preserving their cash and pushing key indicators of money market stress higher on Friday. Euro zone cash markets were frozen for many lenders apart from a select group of healthier banks, pushing the rest to the European Central Bank for cash.
Funding strains in some areas of the market reached levels last seen during the height of the Lehman crisis in 2008. Dysfunctional money markets point to lower chances that the region can grow itself out of the debt crisis. The latest sign of worries that some banks could ultimately collapse under the weight of their holdings of debt issued by crisis-contaminated countries such as Italy was that German treasury bill rates were slowly heading into negative territory.
"When there is panic you don't look at yields anymore, you don't trust parking your money in deposits in the banking system, you want something that protects you cash, even if you pay for it," said ING rate strategist Alessandro Giansanti. German treasury bills of up to 9 months were bid at rates of as much as 0.35 percent, but sellers were asking for prices that would imply negative yields of as low as minus 0.30 percent.
This reflects not only that the unsecured interbank lending has almost dried up, but also that the secured transactions are shrinking in volumes, with many lenders asking for top-rated collateral only - such as German T-bills. In comparison, similar-dated Italian and Spanish bills yielded up to 6 percent.
The cost for European banks to swap euro rates into dollars as measured by the three-month euro/dollar cross currency basis swap rose to its highest since the height of the Lehman crisis in 2008 to 138.50 basis points. The difference between three-month dollar offered interbank Libor rate and overnight index swaps - another widely used gauge of interbank stress - inched higher to 38 bps, the largest since June 2009.
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