Dollar funding costs for European banks stayed high on Wednesday but fears that more institutions would borrow greenbacks from the European Central Bank proved unfounded, with none seeking cash at a weekly tender. European banks are facing higher dollar funding costs as US money fund investors, nervous about exposures to highly indebted peripheral eurozone countries, reduce the length and amount of loans to banks in the region.
The ECB's weekly offering of dollars, which is usually over-priced in comparison with open markets, was used for the first time since February last week, sparking concerns about eurozone bank access to money markets. As large US investors pull back, liquidity in the short-term funding markets has declined and many banks have instead sought to increase deposits and go to the foreign exchange market to swap euros for dollars.
The cost to swap euros into dollars held at elevated levels on Tuesday, suggesting dollar-denominated funding European banks need to run US operations remains constrained. The three-month euro-dollar cross currency basis swap, which falls when dollar funding costs for eurozone banks rise, traded at minus 87 basis points, close to the highest levels seen since the financial crisis.
Despite the US Federal Reserve pledging to keep interest rates at rock bottom until at least 2013, three-month dollar Libor costs have risen around 5 basis points in August but analysts said the relatively modest rise did not tell the whole story. Financial institutions' credit default swap prices - the cost of insuring against a debt default - have also soared in recent sessions with the iTraxx senior financials index widening to record levels above 250 basis points.
Longer-term funding is also an issue with five-year borrowing costs for the major banks ranging from mid-swaps plus 130 basis points for BNP Paribas and Deutsche Bank to mid-swaps plus 350 basis points for Spanish banks Santander and BBVA.
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