The cost of raising US dollars for eurozone banks rose for a second day running on Wednesday as the region's deepening debt crisis made access to the safe-haven greenback more difficult. The rate at which banks on the Libor panel thought they could obtain dollars for three months in the market edged higher.
The 3-month dollar Libor rate rose to 0.24925 percent from 0.249 percent in the previous session and 0.24605 percent on Monday. It is the first time since mid-February that the rate has risen for two consecutive sessions. Eurozone government bond markets have struggled with volatility in recent sessions on growing fears over Italy's massive public debt. The Italian economy is far too big to be bailed out like Greece, Portugal and Ireland.
Analysts don't expect a funding crunch like the one that paralysed financial markets during the 2007/2008 credit crisis, since the European Central Bank is committed to providing liquidity to keep the banking system afloat. But there is some concern eurozone banks could have trouble raising other kinds of funding.
"The liquidity (in the eurozone) is there, it's on tap and the focus is now increasingly on their source of dollars," said Simon Peck, rate strategist at RBS. Last month investors pulled cash out of US money market funds on worries their loans to European banks would go bad if Greece defaults on its debt. The spread between 3-month dollar Libor rates and expected central bank rates - a measure of the risk premium banks charge when lending to each other - widened to 13.925 basis points, its highest since mid-May and up by nearly 2 basis points this week.