‘Lack of trust’ slows bank lending in EU

Money markets are showing rising
levels of mistrust between Europe’s banks on
concern an almost $1 trillion bailout package won’t prevent a sovereign debt
default that might trigger a break-up of the euro.

Royal Bank of Scotland Group Plc
and Barclays Plc led financial firms punished by rising borrowing costs,
British Bankers’ Association data show. The cost to hedge against losses on
European bank bonds is 63 percent higher than a month ago. Investment-grade
corporate debt sales in the region plummeted 88 percent last week to $1.2 billion
from the previous period, according to data compiled by Bloomberg.

The rate banks say they charge each
other for three-month loans in dollars rose to a nine-month high, even after a
government-led rescue designed to prevent Greece from defaulting, and a new
financial crisis. The euro fell to its weakest against the dollar since 2006.

Bank lending “conveys a lack of
trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa-
based Principal Global Investors, which manages $222 billion. “Banks are a
little reluctant to lend overnight as they don’t know the full extent of what
is on the bank balance sheets.”

The three-month London interbank
offered rate in dollars, or Libor, climbed to 0.46 percent today, the highest
since Aug. 7, from 0.445 percent on May 14 and 0.252 at the end of February,
according to the British Bankers’ Association. The three-month Singapore
interbank offered rate, or Sibor, rose to 0.45083 percent, also the highest
level in nine months, according to the city state’s Association of Banks.

‘Access Spotty’

Concerns have spilled into the
market for commercial paper, debt used by companies and banks for their short-term
operating needs. Rates on 90-day paper are more than double the upper band of
the federal funds rate, about twice the average in the five years before credit
markets seized up in mid-2007.

“The list of banks able to tap the
three-month market remains extremely limited with access spotty and expensive,”
Joseph Abate, a money-market strategist at Barclays in New York, wrote in a May 14 note to clients.

The rate at which London-based
Barclays, the U.K.’s third- largest bank by market value, told the BBA it could
borrow for three months in dollars was unchanged today at 47 basis points,
having climbed 2 basis points on May 14 to the highest level since July 2009,
Bloomberg data show. The bank’s rate is up from 34 basis points on April 30 and
1 basis point above three-month Libor. On average, Barclays reported a rate
that was 1.3 basis points below Libor during the past year