The rate at which European banks say they see each other lending in euros for three months dropped to less than the region’s key interest rate for the first time in more than 13 months.
The euro interbank offered rate, or Euribor, for such loans dropped for a 48th day, falling 0.9 basis point, or 0.009 percentage point, to 0.997 percent, according to data from the European Banking Federation. That’s the lowest rate since January 2011 and is the longest run of declines since April 2009, according to data compiled by Bloomberg. It’s the first time the rate has fallen below the European Central Bank’s main refinancing rate, currently 1 percent, since Jan. 13, 2011.
The rate has fallen every day since the ECB allotted a record 489 billion euros ($657 billion) of three-year loans to 523 banks on Dec. 21 to keep credit flowing amid the region’s sovereign debt crisis. The central bank plans to hold a second longer-term refinancing operation for such loans tomorrow, with full allocation a day later. Financial institutions may ask to borrow 470 billion euros from the ECB, the median of 28 estimates in a Bloomberg survey showed.
“Euribor has declined since the LTRO as risk sentiment has improved,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The operation removed concern that banks may have a liquidity issue. Our view is for further falls in Euribor on a decent take-up in this week’s LTRO.”
Analysts at Credit Agricole estimate demand at the tender may rise to between 600 billion euros and 700 billion euros, Green said.
Three-month Euribor may continue to slide, according to futures contracts. The implied rate on the contract expiring in June was little changed at 0.77 percent at 1:39 p.m. London time. It fell to 0.845 percent on Feb. 1, the least for the front Euribor futures contract since June 2010.
A measure of European banks’ reluctance to lend to one another reached the lowest level in almost six 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 64.9 basis points, the lowest since Aug. 31. The spread has narrowed since reaching 100.6 basis points on Dec. 1, the most since February 2009.
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