Lending dries up between Euro’s banks

City A.M. Reporter
BANKS in Europe appear increasingly reluctant to lend to one another, dangerously mirroring scenes last witnessed in the credit crisis of 2008.

So far the strains have been more pronounced in Europe rather than the dollar market, with EURIBOR interbank lending spreads over overnight index swaps having widened to post-financial crisis levels and more banks stashing funds with the European Central Bank (ECB).

The typical barometers of dollar funding -- FRA-OIS spreads, front Eurodollar futures and two-year swap spreads -- showed some deterioration during the worst of the stock market rout but recovered as equities rebounded.

“What we are seeing right now is the typical sort of funding concern story that is playing out in the money markets,” said Michael Turner, a fixed-income and currency strategist at RBC Capital Markets in Sydney.

“Compared to what happened back in 2008, we are not at those very extreme levels but we have to watch the direction. The general advice to clients is to keep things tight and keep risk to the minimum for the time being,” Turner said.

Cash is not circulating in a regular fashion in the Eurozone as jitters about the debt crisis grow.

Banks deposited €145bn at the ECB overnight on Monday, a one-year high, figures showed yesterday.

Evidence of money market tensions has been widespread. Banks took a larger-than-expected €157bn in the ECB’s handout of seven-day funding yesterday.

The EURIBOR rate itself came down slightly yesterday, as the ECB said it was actively purchasing Italian and Spanish bonds.