Funding pressure as China pulls out of Eurozone forex

MONEY market strains worsened yesterday after Standard & Poor’s cut Italy’s credit rating and the Bank of China halted foreign exchange swaps with several European banks.

Eurozone bank borrowing at the European Central Bank’s weekly tender surged to €201bn, the highest in seven months in a sign of growing stress in the sector. Three-month dollar Libor edged up to its highest in more than a year at 0.35500 per cent and the premium for European banks to swap euros into dollars also rose.

The Bank of China, a big market-maker in China’s onshore foreign exchange market, has stopped forex forwards and swaps trading with several European banks due to the Eurozone debt crisis, sources said.

The sources identified French lenders Société Générale, Crédit Agricole and BNP Paribas as among the affected banks.

On the dollar Libor panel, Crédit Agricole’s indicated cost of borrowing was among the highest at 0.425 per cent with those for BNP Paribas and Societe Generale also above average.

Another Chinese bank also halted interest rate swaps trading with some European banks, a source at the bank said, indicating Chinese lenders had joined the ranks of institutions cutting exposure to the Eurozone.