Euro Dollar Swapping Costs Fall for Second Day

October 07 00:00 2011

New York, October 7 ( – In an effort to contain the euro region’s debt crisis, policy makers are making an all-out effort to bring down the euro-dollar swapping costs being paid by banks. The amount that European banks pay to fund in dollars has fallen for the second day. The three-month cross-currency basis swap fell to 98 basis points below the euro interbank offered rate as of 8:30 a/m/ in London, from 101 yesterday, which is the greatest gap since Sept. 21.

Jean-Claude Trichet, European Central Bank President said yesterday that in order to stem the debt crisis, the ECB will resume covered-bond purchases and reintroduce yearlong loans for banks.

Monty Guild, chief executive officer of Guild Investment Management Inc. in Los Angeles wrote in a note that “Events this week have stoked our optimism and should help cool down the fear and panic; specifically, suggestions by senior European officials that a plan to recapitalize banks exists and is likely to be implemented.”

The one-year cross currency basis swap went down from 69.5 basis points to 69 yesterday. Moreover, a measure of banks’ reluctance to lend to one another in Europe fell. The Euribor-OIS spread fell one basis point to 71.5 basis points after having reached 89 basis points on Sept. 23, which was the widest since March 2009. Overnight deposits at the ECB by lenders increased to the highest in more than a year.