Proposals to share the cost of bank failures among corporate bondholders may lead to higher money market rates, analysts said, though ample bank liquidity nudged euro interbank borrowing costs lower on Thursday.
The benchmark interbank euro-Libor fixing edged lower to 0.93313, continuing a gradual decline as a large amount of surplus liquidity in the money market kept borrowing costs low. The eurozone equivalent Euribor fixing also fell to 0.997 percent.
However, the cost to banks of raising funds from corporate bond markets was in danger of rising as fresh proposals to inflict a share of the costs of failing banks on to bondholders rattled credit markets.
"The concept of burden sharing across the board is a huge negative. It will mean that funding for a large number of the financial institutions that are already under some funding pressure is going to become even more difficult and even more expensive," said Jeroen van den Broek, credit strategist at ING. The European Union's executive is set to propose rules this week that could force those that lend to troubled banks to shoulder more of the cost of winding them up, a senior EU official said on Tuesday. The cost of insuring subordinated and senior financial debt rose, according to the Markit iTraxx Credit Default swap indices. The Markit iTraxx senior financial index was up 8 bps at 193 bps.
Credit default swaps for Spanish banks also rose sharply with Santander CDS hitting a record high around 272 bps, CDS monitor Markit said. Some weaker Italian banks' CDS also hit record levels.
"This is going to mean that more banks will be knocking on the door of the ECB for their liquidity once again," van den Broek added. The European Central Bank provides banks struggling to raise funding through interbank channels as a result of credit concerns with access to unlimited funding via its regular loan offerings.