Euribor Declines in Longest Run for 2 1/2 Years on ECB’s Record Liquidity

The rate at which European banks say they see each other lending in euros for three months dropped for a 36th day, the longest run of declines in 2 1/2 years, as record borrowing from the central bank eased funding costs.

The euro interbank offered rate, or Euribor, for such loans dropped 0.7 basis point, or 0.007 percentage point, to 1.07 percent, according to data from the European Banking Federation. That’s the longest run of losses since August 2009, and is the lowest rate since January 2011, according to data compiled by Bloomberg.

The rate has fallen every day since the European Central Bank allotted a record 489 billion euros ($650 billion) of three-year loans to 523 banks on Dec. 21 to keep credit flowing amid the region’s sovereign debt crisis. The ECB plans to hold a second longer-term refinancing operation for such loans on Feb. 28, with full allocation a day later. It will probably keep the main refinancing rate at a record-low 1 percent today, according to a Bloomberg survey of economists.

“The decline in three-month Euribor is being driven by the massive amount of liquidity in the system,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The LTRO at the end of the month should keep the pressure on.”

Private Sector Loans

Three-month Euribor may continue to slide, according to futures contracts. The implied rate on the contract expiring in March was little changed at 0.895 percent at 10:20 a.m. London time. It fell to 0.845 percent on Feb. 1, the least for the front Euribor futures contract since June 2010.

“Forward rates are indicating Euribor may fall further,” Wand said.

Loans to euro-area households and companies contracted the most on record in December as the debt crisis damped demand for credit and banks tightened lending. Private-sector borrowing declined 0.7 percent from November, the most since records began in 1991, the ECB said on Jan. 27.

A measure of European banks’ reluctance to lend to one another reached the lowest level in almost four months today. A lower reading signals a greater willingness to lend.

The Euribor-OIS spread, the difference between the borrowing benchmark and overnight indexed swaps was at 72.85 basis points, the lowest since Oct. 11. The spread has narrowed since reaching 100.6 basis points on Dec. 1, the most since February 2009.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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