European banks’ reluctance to lend to one another declined for the fifth month as the European Central Bank’s program of cheap loans to lenders helped offset renewed concerns the region’s debt crisis is deepening.
The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was 39 basis points at 1:15 p.m. in London, data compiled by Bloomberg show. The measure has fallen every month since November when it stood at 99 basis points.
The ECB’s longer-term refinancing operations in December and February bolstered investor confidence in banks’ capital levels, spurring a rally in credit markets. Lenders’ funding conditions could deteriorate amid a recession in Spain, rising euro-area unemployment and increasing criticism of austerity agendas in election campaigns in France and Greece.
“The LTROs largely minimized the funding risk for European banks, but the shock effect has run its course,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “You could argue we’re re-entering a period of euro-area concern, with Francois Hollande set to win the French elections and Greek elections to be held this weekend.”
The cost for banks to convert euro interest payments into dollars also fell for the fifth month. The three-month cross-currency basis swap was 45 basis points below Euribor, compared with minus 114 basis points at the start of the year.
The ECB offered banks unlimited funding after the basis swap reached minus 157.5 basis points on Nov. 29, the highest cost since October 2008. The measure was 2.5 basis points below Euribor on Jan. 24, 2008, eight months before Lehman Brothers Holdings Inc. filed the biggest U.S. bankruptcy.
“We won’t get back to where we were pre-crisis,” said Wand. “There will always be a few basis points of risk premium associated with what we’ve been through.”
The one-year basis swap rose in April after a three-month decline. The measure was 51 basis points less than Euribor from minus 45.5 on March 30. A basis point is 0.01 percentage point.
Lenders increased overnight deposits at the ECB on April 27, placing 794 billion euros with the Frankfurt-based lender from 791 billion euros the day before.
Three-month Euribor, the rate banks say they pay for three-month loans in euros, fell to 0.708 percent from 0.715 percent. One-week Euribor rose to 0.317 percent from 0.316 percent.
The London interbank offered rate, or Libor, for three-month dollar loans was unchanged at 0.466 percent.