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Money markets euribor rates fall below their us equivalent


´╗┐Interbank Euribor rates have fallen below their dollar counterparts as money markets expect the European Central Bank to play catch up with the near-zero rate policy of the U.S. Federal Reserve. Money markets are increasingly pricing in the possibility that the ECB will cut refi rates again in the second half of this year and/or reduce the deposit facility rate which would take it to negative territory. While only seven in a Reuters poll expect the central bank will cut the refi rate by 25 basis points for a second month in a row in August, the survey showed a clear majority - 44 out of 69 - expect it will do so before 2013. An interest and deposit rate cut earlier in July, along with expectations of more to come, drove three-year Euribor rates to new record lows this week and below U.S. interbank lending rates last for the first time since 2008 recently. But analysts said the move was more a reflection of rate expectations than any indication that the escalation in the euro zone debt market was seeping through into money markets."In January 2008, it was tensions in the U.S. dollar market that pushed three-month Libor up. This explains why in that period, the dollar Libor was much higher than Euribor," Giuseppe Maraffino, strategist at Barclays said.

"Now the fact Euribor is lower than dollar Libor reflects different monetary policy expectation between Europe and the U.S. (rather than rising tensions in Europe)."Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.427 percent from 0.435 percent. That was below the U.S. dollar Libor rate which last stood at 0.448 percent. Maraffino said the market was pricing in some chance of a rate cut in the fourth quarter of the year, while in the United States the debate is now more about whether or not the Fed would do another round of quantitative easing. Fed Chairman Ben Bernanke last week offered a gloomy view of the economy's prospects, but provided few concrete clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus.

"U.S. rates are already close to zero, so the Fed is not expected to cut the Fed fund rates further, whereas in the euro zone, markets are pricing in further monetary policy action by the ECB via a policy rate cut," Maraffino added. The spread between three-month Euribor rates and three-month dollar Libor rates fell below zero for the first time since 2008 on Friday and was last at -2 basis points. Given market expectations for lower interest rates in the euro zone, analysts expected that gap to fall further, as far as -10 to - 15 bps.

"You could argue that the ECB has not been as accommodative as the Fed until now. So if it's a catch-up game, then the gap can be closed but it's going to be closed on the ECB's leg, not on the Fed's leg," Matteo Regesta, strategist at BNP Paribas said. Both the ECB and the Fed will hold monetary policy meetings next week. Markets are hoping for at least some signal of further action as Spanish borrowing costs rose sharply this week in the latest escalation of the euro zone debt crisis. Two rounds of cheap ECB financing has insulated money markets somewhat from volatile debt markets by ensuring banks are awash with cash. But the liquidity has done little to solve their underlying problems and to inspire banks to lend. In a sign of that reluctance, the ECB said 11 percent of banks that took part in its latest quarterly Bank Lending Survey made it harder for companies to borrow in the second quarter, while only 1 percent eased their rules. Separate data showed the ECB saw a jump in demand for its dollar funding as a deepening crisis left an increasing number of banks reliant on central bank support."It tells you that with the escalation of the euro crisis to yet higher levels, pressure for dollar funding is increasing. European institutions are recently finding it more difficult to fund in non-euro denominated assets," Regesta said. "That's clearly a result of risk aversion."

Money markets more inertia as markets await ecb, greek polls


´╗┐* Greek euro exit would make banks even more reluctant to lend* Jump in counterparty risks seen in that scenario* Spanish sovereign, bank CDS are rising sharplyBy Ana Nicolaci da CostaLONDON, May 21 Key measures of counterparty risk have stabilized in recent months and are seen range-bound, with market players looking to the European Central Bank monetary policy meeting in June to see whether it will signal further monetary stimulus. The Greeks also go to the polls next month and if pro-bailout parties do not manage to win a majority that would increase speculation the country would run out of money and that it would eventually be forced out of the euro. The three-month spread between Libor rates and overnight index swap rates - an indicator of financial stress - fell from 55 basis points to around 30 basis points between the beginning of March and early April as sentiment on the euro zone improved. Since then, however, the spread has stopped falling, stabilising at around 30 basis points for the past two months, as the impact of cheap European Central Bank (ECB) financing faded while euro zone tensions resurfaced due to worries about Spain's finances and speculation that Greece may eventually leave the euro. One trader said that if Greece left the euro the LIBOR/OIS spread could immediately jump sharply higher in a knee-jerk reaction. He said spreads could initially rise as far as 60-70 bps and that only the ECB could prevent a further rise in the measure of counterparty risk. In December of last year, the spread rose as far as 93 bps on worries about the euro zone.

"Until the ECB comes in and offers (banks) another long-term (refinancing operation), there is no reason for (spreads) not to blow out," the trader said. The ECB in December and February offered two rounds of cheap 3-year financing which helped ease tensions in both money markets and sovereign debt markets at the beginning of 2012. The excess liquidity helped take Euribor rates to new two-year lows on Monday but concerns over the euro zone's growth prospects, Spain's banking system and Greece's membership of the euro have also helped Euribor/OIS spreads - another measure of counterparty risk - to stabilise in recent months. Analysts are especially concerned about the contagion risks from a Greek exit. Markets may begin speculating other peripheral countries could leave the currency bloc, sending yields on their debt sharply higher and making it more difficult for them to borrow in commercial markets.

"As we have seen already last week, people and companies are withdrawing money from countries at risk of exiting the euro and are moving their deposits to safer countries or even safer currencies," Adam Kurpiel, head of rates derivative strategy at Societe Generale in Paris, said. SPANISH CDS SURGE Worries about a run on Greek banks rattled Athens last week, after savers withdrew at least 700 million euros on Monday alone, according to minutes of President Karolos Papoulias's comments to political leaders posted on the presidency's website.

"Before the ECB steps in to manage the situation, the knee-jerk reaction may be a widening of spreads," Kurpiel added, referring to Libor/OIS and credit default swaps. Societe Generale said in a recent research note that contagion into Italy and Spain would lead to a funding gap of 350 to 700 billion euros, assuming 20-30 percent deposit outflows."A higher probability of a Greek exit means a higher probability of a more generalised run on European banks and of money market paralysis," Kurpiel a d ded. Last Thursday, Spain's Bankia was reported to have seen more than 1 billion euros drained by its customers in the past week, but the Spanish government denied the newspaper report. The country's struggling banking system, along with its deteriorating fiscal position, has been a source of concern for investors who are now demanding more than a 6 percent yield to hold 10-year Spanish debt. Meanwhile, the cost of insuring five-year Spanish debt against default has surged 54 bps over the past month to 556 bps. The credit default swaps on debt issued by Spanish bank BBVA have jumped 59 bps to 491 bps and the equivalent for peer Santander rose 20 bps to 436 bps over the same period."The markets know that if Greece looks likely to be leaving the euro, there will almost certainly be a run in Greek banks and that could see into the other peripheral countries where you could also see bank runs as well. That's probably the main factor (impacting CDS) at the moment," Gavan Nolan, an analyst at Markit said.