Money markets libor costs fall but french rates still high

← Homepage

NEW YORK, Feb 10 Short-term interbank borrowing costs diverged widely on Friday with French banks reporting much higher short-term rates than other banks, suggesting pressures in the euro zone remain even as the benchmark interbank lending rate's decline continues. The three-month London Interbank Offered Rate (Libor) fell to just under 51 basis points on Friday, and is down from over 58 basis points at the beginning of the year. The three largest French banks - Societe Generale, BNP Paribas and Credit Agricole - all reported much higher borrowing rates than the remainder of the panel, at more than 60 basis points. "Very little of the move has come from any euro zone banks, there are 'have' and 'have nots' within the Libor panel," said Ira Jersey, interest rate strategist at Credit Suisse in New York. Fears over European government and bank debt have dramatically declined since the banks borrowed 489 billion euros ($645 billion) in low-interest loans from the European Central Bank in December, helping higher-risk credits such as Portugal to sell new debt. But investors are getting nervous again that the take up of new three-year loans at the next Long-Term Refinancing Operation (LTRO) on Feb. 29 may not be as high as they had previously expected. That could mean there are fewer funds sloshing through the system to buy up new debt sales and could also mean that banks may not hold as much of the collateral needed to get central bank loans as people had hoped. "The ECB has tempered some of the more outlandish expectations," Bank of America analysts said in a report on Friday. "Some of the steepening in peripheral curves on expectations of significant carry trades being established on the back of the second LTRO may be overdone." ECB President Mario Draghi said on Thursday that the bank has expanded the pool of collateral to include 600 billion euros in credit claims that it will accept at the next three-year tender, but after haircuts that would fall to around 200 billion euros. "Investors are getting concerned that the liquidity situation of the European financial system might not be as liquified as people hoped it would be," said Credit Suisse's Jersey. Meanwhile, the cost of borrowing overnight against Treasuries in the U.S. repurchase agreement market continued to trade at relatively elevated levels on Friday as increased Treasury bill supply weighed on rates. The Treasury said on Thursday that it will sell $64 billion in new three- and six-month bills next week. The overnight repo rate for general collateral traded at 16 basis points. ($1 = 0.7582 euro)