This is the divergence that’s taken place between three-month Euro Libor (as set by 16 banks in London) and Euribor (as set by 42 banks in Europe) since about June 2009:
As the FT noted back in June 2010:
The divergence is also due to the different ways the two rates are set as euro Libor is the rate banks expect they will individually borrow at while euribor is the rate they think a prime, or big bank, will borrow at.
The gauges were almost identical until last summer – they have steadily diverged since to trade 7 basis points apart.
Considering that the divergence is supposedly an indication of European tensions and the emergence of a two-tier euro market — we note with interest the following comment on Market News on Wednesday:
LONDON (MNI) – The European Central Bank’s latest monetary operation, which saw E23.166 billion allotted in a 3-month long term refinancing operation (LTRO), failed to prevent the continuing ascent in euro LIBOR rates.
The 3-month euro LIBOR rate was up 0.31 basis points on the day to stand at 0.83063%, its highest level since August 18 last year.
The euro LIBOR/OIS three month spread widened by just over 0.9 basis points to just below 26.6 basis points. Sterling and dollar 3-month LIBOR rates were both down on the day, and the corresponding LIBOR/OIS spreads in these currencies narrowed by 0.56 and 1.1 basis points respectively.
The funding stresses are showing up at present only in the euro rates, with the latest ECB LTRO likely to be the last operated under the ECB’s crisis liquidity framework.
All of which is even more interesting when you consider the following article from the July edition of Risk magazine, which points to the European Banking Federation (EBF) — which sets the panel that dictates Euribor — possibly expanding the list of banks featured in the panel to include more peripheral names.
As they note:
The European Banking Federation (EBF) is looking at expanding the panel of banks that contribute to Euribor fixings to include more peripheral and mid-tier institutions – a change that could nudge fixings higher and alter the relationship between Euribor and other key rate market benchmarks, possibly forcing more hedging activity.
“I’m leading a study to enlarge the panel to new regions of the euro system. Any changes will be announced around November, but no final decision has been taken,” says Cédric Quemener, the Brussels-based manager of Euribor-EBF.
Which we presume might either make the rate a much better reflection of real eurozone funding pressures… and hence good for the market. Or possibly penalise those eurozone institutions which have easy access to funds.
Either way, in the land of two-tier rates, it’s a development that is definitely worth watching.
Related links:
The cost of normalisation - FT Alphaville
Interbank rates diverge in sign of Europe bank stress – FT