Euro Money Market Stress Indicator Reaches 2 1/2 Year High

Sept. 9 (Bloomberg) -- The Euribor-OIS spread, a measure of banks’ willingness to lend to each other, reached the widest level in 2 1/2 years, a sign of mounting financial-market tension in the euro area.

The spread widened to 83 basis points at 5:43 p.m. in London, the highest level since March 2009 and up from 74.95 basis points yesterday. The difference widened as the yield on forward contracts based on the euro overnight index average, or Eonia, slid 7.4 basis points to 0.7085 percent after the European Central Bank signaled yesterday it may take further steps to fend off the region’s debt crisis.

“It certainly does indicate that there are stresses, but it doesn’t mean back to 2008,” when the measure surged to as high as 206.9 basis points and Lehman Brothers Holdings Inc. collapsed, said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in London. “This time we have the ECB pumping money into the system. That’s quite a different story.”

Stocks fell for a second day and German two-year yields were pushed to a record low today amid mounting bets in derivatives markets on a Greek default. The euro fell to a six-month low versus the dollar and European bank stocks fell for the first time in three days.

The eight largest U.S. money-market funds halved investments in German and U.K. banks over the past 12 months, eliminated their lending to Italian and Spanish firms and reduced investments in French banks, data compiled by Bloomberg and published in today’s Bloomberg Risk newsletter showed.

Basis Swap

The premium European banks pay to borrow in dollars for one year through the swaps markets increased to the most since December 2008, “also a worrying sign,” according to RBC’s Schaffrik.

The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, fell 6.4 basis points to 65.5 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback, according to data compiled by Bloomberg.

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To contact the editor responsible for this story: Daniel Tilles at