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Banks’ Dollar Funding Stress Eases to Year Low on Euro Optimism

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July 27 (Bloomberg) -- A measure of bank stress in Europe dropped to the lowest in more than a year after government leaders followed European Central Bank President Mario Draghi in pledging to do whatever it takes to preserve the euro.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 39 basis points below the euro interbank offered rate at 4 p.m. in London from 41.5 yesterday, data compiled by Bloomberg show. The cost is the cheapest since July 26, 2011.

German Chancellor Angela Merkel and French President Francois Hollande said today they would do everything necessary to protect the single currency, echoing comments from Draghi yesterday that boosted euro-area peripheral country debt and lifted stocks. European banks’ dollar funding costs have fallen 30 basis points since July 5 when the ECB cut rates.

“Dollar holders may have become more willing to lend to European banks after Draghi’s comments,” said Chris Clark, an interest-rate strategist at ICAP Plc, the world’s largest interdealer broker. “This eases pressure on the euro-dollar basis swap.”

Three-month Euribor, the rate banks say they see each other lending in euros, was set at a record low 0.415 percent today. The benchmark, derived from a daily survey of banks for the European Banking Federation, has fallen every day since the ECB lowered its deposit rate to zero.

The one-year euro-dollar basis swap was 47 basis points, or 0.47 percentage point, below Euribor from minus 50 yesterday.

Improved Perceptions

“From the U.S. point of view, there was a general improvement in credit perception of European banks after the ECB’s rate cut,” said Giuseppe Maraffino, a fixed-income strategist at Barclays Plc in London.

The London interbank offered rate, or Libor, for three-month dollar loans was little changed at 0.447 percent, the lowest since Nov. 8. Libor is published by the British Bankers’ Association.

The euro overnight indexed average, or Eonia, of unsecured lending transactions was set at a record low 11.2 basis points yesterday from 11.4 the day before. Eonia is set by a survey of the same banks that contribute to Euribor.

An estimate of overnight borrowing costs over the next three months, the Eonia overnight indexed swap, fell to as low as 7.6 basis points from 9.3 yesterday.

Banks cut overnight deposits at the European Central Bank to the lowest since Dec. 21 yesterday, placing 321 billion euros ($394 billion) with the Frankfurt-based ECB from 337 billion euros on July 25.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

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

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