Financing conditions for European borrowers tightened on Wednesday to levels last seen in May as a Moody's warning to cut Spain's credit ratings reminded investors the eurozone sovereign debt crisis is far from over. Moody's put Spain's Aa1 rating on review for a downgrade, sending the cost of insuring Spanish debt against default and its 10-year bond yields high ahead of a European Union summit aimed at taking measures to quell the debt crisis.
Three-months euro/dollar basis prices were around -63 basis points, according to Icap, edging close to the -70 bps reached prior to the European Union/IMF bailout of Greece in May to avoid it defaulting on is debt. The more negative the figure is, the more expensive it is to obtain dollar funding.
In the more liquid 10-year sector, the euro/dollar basis swap spread was at -24.75 bps, a deterioration from -19.75 bps early December and getting close to the -25.5 bps reached at the end of November when contagion from Ireland spread to Portugal and Spain, according to Tullet Prebon. It widened to -26.5 bps in May before the European Union/IMF bailout of Greece.
Excess eurozone money market liquidity has hit almost 90 billion euros in recent days, as banks ready themselves to pay back - or reborrow - over 200 billion euros of 1-year and 3-month funding on December 23. London interbank offered rates for three-month euros slipped to 0.95000 percent from 0.95313 percent on Tuesday. The equivalent maturity Euribor rate- traditionally the main gauge of unsecured interbank euro lending fixed by a broader panel of European banks than Libor - ticked down to 1.025 percent from 1.026 percent. Overnight rates dropped to 0.566 percent on Tuesday.