By David Oakley in London and?Ralph?Atkins in?Frankfurt
Published: June 3 2010 19:28 | Last updated: June 3 2010 19:28
Tensions in the European international lending markets jumped on Thursday to the highest levels this year as banks are increasingly refusing to lend to each other.
Three-month euribor, or the cost to borrow money in euros over three months, rose to 0.706 per cent – the highest level since December 29. In contrast, the cost to borrow Swiss francs over three months has fallen to a record low since data was first collected in January 1989.
This is because of the Swiss National Bank pumping money into the market to prevent its currency strengthening against the euro. The last time the SNB intervened was on May 19, according to traders.
However, the critical rate is euribor, which highlights the increasing refusal of banks to lend because of worries over counterparty risk – the threat of another bank failing to pay back its loans because of the eurozone debt crisis.
Don Smith, an economist at interdealer broker Icap, said: “There are plenty of banks wanting to borrow but very few prepared to lend. They are also only prepared to lend to the strongest banks.”
This has been reflected in the growing differences between the rates various banks are charged for lending. For example, UBS was quoted a rate of 50 basis points for three-month money on Thursday whereas West LB was quoted 71bp.
The smallest and weakest banks cannot access the international lending markets at all. Worries over counterparty risk have also prompted more banks to park their money at the European Central Bank.
Although the rate offered by the ECB is only 0.25 per cent, banks are prepared to accept a low return in exchange for the assurance they will not lose their money.
Underscoring financial market tensions, eurozone banks have set a fresh record for the amount parked overnight at the ECB. Use of the ECB’s deposit facility reached €320.4bn ($390.5bn) on Wednesday – a fresh high and more even than in the period after the collapse of Lehman Brothers in 2008.
.Copyright The Financial Times Limited 2010. You may share using our article tools
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