(Bloomberg) — The cost for European banks to fund in dollars, a gauge of risk in the region's financial system, rose to the most expensive level in almost two years as Greece's rejection of the country's bailout program raised concern the government may run out of money.
The one-year cross-currency basis swap, the rate for banks to convert euro payments into dollars, was 26 basis points, or 0.26 percentage point, below the euro interbank-offered rate at 5 p.m. in London, according to ICAP Plc data. That's the most negative reading on a closing basis since April 2013. The measure reached as much as 107 basis points below Euribor in December 2011.
A negative cross-currency swap rate signals traders are paying a premium to exchange euro-based cash flows for comparable flows denominated in dollars.
Greece's government bonds plunged with those of its lenders on Monday after Prime Minister Alexis Tsipras stoked market tension in an address to parliament the previous day, saying he still plans to ditch an existing funding plan that ends on Feb. 28. There will be an emergency meeting of the currency bloc's finance ministers to discuss the situation on Wednesday. The European Central Bank restricted access to funding lines for Greek financial institutions last week.
The ECB's decision "kept the ongoing negotiations sharply in focus," Mika Inkinen and Valerian Branco, London-based strategists at JPMorgan Chase & Co., wrote in an e-mailed note. "We still hold our medium-term constructive view that an agreement will eventually be reached between Greece and the rest of the region. However, the path to an eventual agreement could be more confrontational than we had initially anticipated."
Greece's three-year note yield rose 308 basis points to 21.08 percent on Monday, the biggest increase since the nation's debt was restructured in March 2012. National Bank of Greece SA's 4.375 percent notes due April 2019 fell for a fourth day, sliding 4.45 cents on the euro to 59.21 cents, according to data compiled by Bloomberg.
Predictions for the Euribor-OIS spread in June, a measure of bank risk based on swaps and futures markets, or so-called FRA/OIS spreads, rose to 16.9 basis points, the most since December 2013, based on closing prices. It climbed to 80 basis points in December 2011.
The probability that one of the euro-area countries will leave the euro bloc within 12 months was 24 percent, based on the most-recent reading on Jan. 31, the highest since April 2013, according to a Sentix index based on a monthly survey of individual and institutional investors. The probability reached 73 percent in July 2012.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Richard Jones in London at rjones207@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins
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