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Banks’ Reluctance to Lend to Each Other Falls to 2 1/2-Month Low

Jan. 23 (Bloomberg) -- A measure of banks’ reluctance to lend to one another in Europe fell to the lowest in 2 1/2 months as the European Central Bank pumps cheap cash into the region’s financial system.

The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, narrowed to 82 basis points at 12:35 p.m. in London. That’s the smallest gap since Oct. 31 and compares with 85 basis points on Jan. 20. A basis point is 0.01 percentage point.

The measure has declined every week since the start of the year after the ECB cut interest rates and lent banks 489 billion euros ($635 billion) to avert a credit crunch after the market for financial firms’ unsecured debt seized up. The Frankfurt-based central bank is holding a second auction of cheap funding next month as part of its long-term refinancing operation.

“There is less concern about immediate bank liquidity issues so money is circulating through the system better than a couple of months ago,” said Marchel Alexandrovich, an analyst at Jefferies International Ltd. in London. “The markets are way too optimistic and this sentiment will change.”

Overnight deposits increased at the ECB, as lenders parked 492 billion euros with the central bank on Jan. 20, compared with 421 billion euros the previous day. Deposits soared to a record 528 billion euros on Jan. 17.

Dollar Swaps

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, held near 76 basis points below the euro interbank offered rate. That’s the lowest cost since Aug. 8.

The one-year basis swap was at 68 basis points less than Euribor, the lowest since Nov. 7, from 68.5 on Jan. 20.

Three-month Euribor, the rate banks say they pay for three-month loans in euros, fell to 1.168 percent. That’s the lowest since March and compares with 1.182 percent on Jan. 20. One-week Euribor dropped to 0.429 percent from 0.433 percent.

The London interbank offered rate, or Libor, for three-month dollar loans was little changed at 0.560 percent from 0.561 percent.

To contact the reporter on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net

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

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