Banks' reluctance to lend in Europe jumps on Greek vote concern

A measure of banks' reluctance to lend to one another rose to a five-week high as Greece pledged to hold a referendum on Europe's expanded bailout plan, stoking concerns the region's debt crisis will deepen.

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight index swaps, was 85 basis points at 11:08 a.m. in London from 81 yesterday. That's the highest since Sept. 26 and compares with 89 basis points on Sept. 23, when the measure was its widest since March 2009.

The referendum and confidence vote called by Greek Prime Minister George Papandreou risk pushing the country into default if voters reject the EU's proposals. An opinion poll published Oct. 29 showed most Greeks believe the euro area's expanded bailout package and debt writedown are negative.

The Greek vote “risks re-elevating significant debt crisis concerns in the coming months,” said Padhraic Garvey, head of developed debt-market strategy at ING Groep NV in Amsterdam. “Overall, the tone is more negative than we had anticipated, and is worrying.”

The cost for European banks to fund in dollars surged. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 100 basis points below the euro interbank offered rate from 92 yesterday. That's the widest gap since Oct. 6.

The one-year basis swap was 66 basis points under Euribor from 63 yesterday. A basis point is 0.01 percentage point.

Lenders decreased overnight deposits at the European Central Bank. Banks parked 217 billion euros ($298 billion) at the Frankfurt-based ECB yesterday, down from 248 billion euros on Oct. 28. That compares with a year-to-date average of 66 billion euros.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- fell to 1.585 percent from 1.591 percent yesterday. One-week Euribor fell to 1.134 percent from 1.136 percent.