Expectations the European Central Bank will have to act to stem the eurozone debt crisis grew on Wednesday, with markets taking the view that easy liquidity conditions will stay in place for now. A tightening of the yield premiums of the eurozone's more indebted issuers reflected a growing view that the central bank may go further and increase its asset purchase programme when it meets on Thursday.
Although there has been no indication from the ECB that it is considering such a move. The agreement of an 85-billion-euro funding package for Ireland on Sunday failed to stop the rot among so-called eurozone peripheral issuers, with the premium investors demand to hold Spanish and Italian debt hitting new euro lifetime highs this week. "This will possibly be the most important meeting of (ECB President) Trichet's tenure," said ICAP broker Kevin Pearce, referring to the central bank's policy meeting on Thursday.
The increasing stress has also raised the cost of raising dollar funds for banks and business. Five-year euro/dollar cross-currency basis swaps - which show the rate charged when swapping euro interest payments on an underlying asset into dollars - hit -41 basis points, levels last seen in May when Greece sought a bailout package and almost double levels seen at the start of November. Benchmark eurozone interbank Libor rates were little changed at 0.96875 percent, and equivalent Euribor rates dropped to 1.026 percent.
Previous expectations that the ECB would switch its 3-month liquidity operations back to competitive auctions next year have faded fast in recent days. The market cost of securing three-month funding in a year's time was last at 1.06 percent, having fallen by almost 20 basis points since November 18, according to Reuters data.