MONEY MARKETS-Financing conditions tight for European borrowers

* Euro/dollar cross currency swaps fall near May-lows

* Moody’s rating cut warning on Spain adds to mkt unease

* U.S. banks wary as euro zone peripheral tensions stay high
(Recasts, changes byline, dateline from HONG KONG)

By Emelia Sithole-Matarise

LONDON, Dec 15 (BestGrowthStock) – Financing conditions for European
borrowers tightened on Wednesday to levels last seen in May as a
Moody’s warning to cut Spain’s credit ratings reminded investors
the euro zone sovereign debt crisis is far from over.

Moody’s put Spain’s Aa1 rating on review for a downgrade,
sending the cost of insuring Spanish debt against default and
its 10-year bond yields high ahead of a European Union summit
aimed at taking measures to quell the debt crisis.

The cost to European borrowers of accessing highly liquid
dollar funds and swapping them back into euros — cheaper than
borrowing euros directly — rose, showing U.S. banks more
reluctant to provide funding based on euro-denominated
collateral.

Three-months euro/dollar basis prices were around -63 basis
points, according to Icap, edging close to the -70 bps reached
prior to the European Union/IMF bailout of Greece in May to
avoid it defaulting on is debt.

The more negative the figure is, the more expensive it is to
obtain dollar funding.

“This morning’s ratings announcement concerning Spain has
helped add fuel to the recent falls in EUR/USD basis prices,”
Icap analyst Chris Clark said.

The five-year euro/dollar basis swap spread– which shows
the rate charged when swapping euro interest payments on an
underlying asset into dollars — was at -37 basis points and
edging close to -39 bps reached in May at the height of the
Greek phase of the debt crisis.

“That shows that the level of systemic stress feeding
between the euro zone financial and sovereign sectors remains at
critical levels,” Lena Komileva, Tullet Prebon head of G7 market
economics said.

RISKS
In the more liquid 10-year sector, the euro/dollar basis
swap spread was at -24.75 bps, a deterioration from -19.75 bps
early December and getting close to the -25.5 bps reached at the
end of November when contagion from Ireland spread to Portugal
and Spain, according to Tullet Prebon. It widened to -26.5 bps
in May before the European Union/IMF bailout of Greece.

“We’re really very close to these critical levels of
intervention,” Komileva said. “It just shows the negative
feedback loop between financial and systemic risks remains very
strong and the EU’s safety net looking inadequate even before it
has been activated.”

Meanwhile, key euro-priced bank-to-bank lending rates eased
as the level of excess cash in money markets hit a three-month
high ahead of the repayment of the European Central Bank’s third
and final portion of 1-year loans at the end of the month.

Excess euro zone money market liquidity has hit almost 90
billion euros in recent days, as banks ready themselves to pay
back — or reborrow — over 200 billion euros of 1-year and
3-month funding on December 23.

London interbank offered rates for three-month euros slipped
to 0.95000 percent (EUR3MFSR=: ) from 0.95313 percent on Tuesday.
For latest Libor fixings see [ID:nEAP000031]

The equivalent maturity Euribor rate (EURIBOR3MD=: ) —
traditionally the main gauge of unsecured interbank euro lending
fixed by a broader panel of European banks than Libor — ticked
down to 1.025 percent from 1.026 percent. Overnight rates
(EONIA=: ) dropped to 0.566 percent on Tuesday.

(Editing by Patrick Graham)

MONEY MARKETS-Financing conditions tight for European borrowers