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Banks’ Reluctance to Lend to Each Other Falls to Eight-Month Low

European banks’ reluctance to lend to one another fell to the lowest in eight months as cheap central bank loans helped lenders weather renewed concerns that the region’s debt crisis is deepening.

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was 41 basis points at 12:44 p.m. in London from 42 yesterday, data compiled by Bloomberg show. The measure, which started the year at 95 basis points, is the lowest since Aug. 1.

Spanish bonds fell for a fourth day on bets the European Central Bank’s program of loans to boost bank liquidity won’t be enough to keep the region’s crisis from infecting larger economies. Spain’s 10-year yield relative to Germany widened 24 basis points to a four-month high of 427 basis points, even as the Iberian government reiterated a pledge to cut its deficit.

“The effect may be wearing off a little on the sovereign front as we see spread widening on Spanish and Italian bonds, but so far that hasn’t affected money markets where spreads remain near the eight-month low,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London.

The cost for banks to convert euro interest payments into dollars rose. The three-month cross-currency basis swap was 56.5 basis points below Euribor from 54 basis points on April 5. The cost reached an eight-month low of minus 49.5 on March 26.

The one-year basis swap was 54.5 basis points less than Euribor from 51 basis points on April 5. A basis point is 0.01 percentage point.

Lenders increased overnight deposits at the European Central Bank on April 5, placing 785 billion euros with the Frankfurt-based bank, up from 773 billion euros the day before.

Three-month Euribor, the rate banks say they pay for three-month loans in euros, fell to 0.764 percent from 0.766 percent on April 5. One-week Euribor fell to 0.316 percent from 0.317 percent on April 5.

The London interbank offered rate, or Libor, for three-month dollar loans was unchanged at 0.469 percent.

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