Bank Lending Stress Holds at Five-Year Low Before EU Heads Meet

A measure of stress in Europe’s short-term interbank lending market held near a five-year low as the region’s leaders prepare for a summit in Brussels.

The difference between the euro interbank offered rate and overnight index swaps, known as the Euribor-OIS spread, was 12 basis points, or 0.12 percentage point, at 3:26 p.m. in London, data compiled by Bloomberg show. The gauge fell to 11.8 basis points on Oct. 11, the tightest since August 2007.

European Union leaders meet on Oct. 18-19 as Greece tries to strike a deal on economic policies and Spain resists asking for a bailout. German Finance Minister Wolfgang Schaeuble’s comment yesterday that a Greek default “will not happen” stoked optimism that EU leaders can contain the debt crisis.

“The spread tightening is an indication of better conditions in the interbank market,” said Alessandro Giansanti, a senior strategist at ING Groep NV in Amsterdam. “Expectations that the meetings of Europe’s leaders in Brussels might go some way to resolve the crisis is helping the spread to tighten.”

Banks bid for 90 billion euros ($117 billion) at the European Central Bank’s seven-day refinancing auction on Oct. 9. That’s the lowest in five months and down from as much as 292 billion euros in December before the ECB pumped more than $1 trillion euros of cheap loans into the financial system.

The volume of overnight lending as measured by the European Banking Federation in Brussels rose to 31 billion euros on Sept. 26, the highest since April.

‘Less Dependent’

“We’ve recently seen a reduction in the takeup of the weekly refinancing operation at the ECB, and the volume of overnight lending has soared showing banks are less dependent,” Giansanti said.

The cost for European banks to borrow in dollars was little changed. The three-month cross-currency basis swap was 25 basis points below Euribor. The one-year basis swap was little changed at 26 basis points below Euribor.

Three-month Euribor, the rate banks say they see each other lending at in euros, was set at a record low 0.209 percent from 0.210 percent on Oct. 12. The benchmark is derived from a daily survey of banks for the European Banking Federation.

The EBF’s euro overnight index average, or Eonia, of unsecured lending deals was set at 0.092 percent on Oct. 12 from 0.095 percent the day before. The Eonia swap, an estimate of average overnight borrowing costs over the next three months, was 9 basis points from 8.8 on Oct. 12.

Lenders increased overnight deposits at the European Central Bank to 260 billion euros on Oct. 12 from 243 billion euros the day before.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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