Dollar funding costs surge

European bank funding strains stayed high on Monday with the cost of short-term dollars edging up on fears over exposure to debt-choked Greece as Athens struggled to get aid talks back on track and avoid a default. Shares in French banks, which have among the highest holdings of peripheral eurozone sovereign debt, slid more than 10 percent on speculation their credit ratings could soon be downgraded by Moody's due to their exposure to Greek bonds.
The cost of insuring against bank defaults rose - the iTraxx senior financial CDS index topped 300 basis points for the first time on record, according to data provider Markit. London interbank offered rates for three-month dollars maintained their march higher and fixed at 0.34289 percent, up from 0.33784 percent on Friday. Among banks' individual submissions of the rates at which they say they can borrow dollars, France's Credit Agricole put in one of the highest at 0.41 percent while peers Societe Generale and BNP Paribas were just above the average daily fixings.
"There were concerns this morning about French banks and this is translating into pressure in the dollar funding markets and given the ongoing bad news we're seeing in Europe, the risk is that this situation will continue to deteriorate," said Philip Tyson, a strategist at MF Global in London.
The cost to swap euros into dollars rose again as the single currency fell to a seven-month low versus the greenback in the spot market. The three-month euro-dollar cross currency basis swap, which falls when dollar funding costs for eurozone banks rise, traded at minus 125 basis points, a level last seen in late 2008 though still well below the minus 300-plus touched after Lehman Brothers' collapse.
The six-month dollar Libor rate rose to 0.51328 percent, its biggest daily rise since November, when Ireland was forced to follow Greece into seeking an international bailout. Euro-priced interbank rates fell, pushed down by 110 billion euros in excess cash and growing bets the ECB may soon have to cut interest rates in response to the debt crisis and sluggish growth.