Dollar funding strains persist after euro zone deal

The cost of dollar borrowing implied by cross currency basis swaps was little changed on Thursday after euro zone leaders struck a deal with private bondholders on a writedown of their Greek bond holdings.

The bid rate on one-year euro/dollar cross currency basis swaps, which effectively allow banks to borrow dollars in exchange for the euro as collateral, last stood at minus 68.8, staying within October's range of minus 77.3 to minus 64 .

The euro/dollar cross currency basis swap had widened to minus 80.62 in late September, the widest since December 2008. At the peak of the global financial crisis in October 2008, the euro/dollar basis swap had widened to minus 139.30.

"It is not as if (dollar funding) conditions are getting tighter each day, but they have not eased all that much either," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

Several financial market gauges including those related to dollar funding conditions, point to elevated levels of financial market stress, and pose a contrast to a recent rally in global equity markets, Okagawa said.

"Although global stock markets have rebounded recently, other gauges of market stress, such as European credit default swaps as well as yield spreads between German bonds and other euro zone debt, have not moved that much," he said.

Euro zone leaders struck a deal with private banks and insurers on Thursday for them to accept a 50 per cent loss on their Greek government bonds under a plan to lower Greece's debt burden and try to contain the two-year-old euro zone crisis.