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Money Market Signals Increased Lending Stress for European Banks

A money-markets indicator is signaling that banks are increasingly reluctant to lend to one another as euro-area leaders discuss the future of the region’s currency.

Predictions in the forward market for the three-month euro interbank offered rate relative to overnight indexed swaps, known as the FRA/OIS spread, widened for the third day to 39.5 basis points at 8:50 a.m. in London, data compiled by Bloomberg show. The measure was 39 on May 18 and reached a three-month high of 43 on May 14.

German and French leaders are gathering in Berlin before a May 23 European Union summit amid concern Greece will exit the euro. Group of Eight leaders urged Greece to stay within the euro area on May 19 as polls in the country showed a close race between parties supporting and opposing the EU’s bailout deal.

The Euribor-OIS spread, a measure of banks’ current willingness to lend to each other, held near 38 basis points for the 12th day.

The three-month cross-currency basis swap, the cost for banks to convert euro interest payments into dollars, was 50 basis points below Euribor from minus 53 on May 18. The one-year basis swap was 69 basis points less than Euribor from minus 71. A basis point is 0.01 percentage point.

Lenders increased overnight deposits at the Frankfurt-based European Central Bank on May 18, placing 790 billion euros ($1 trillion) with the bank from 762 billion euros the day before.

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