MONEY MARKETS-Future interbank rates seen rising near-term
* Euribor futures rise across 2012 strip after German GDP
* But rise seen only a brief pause in falling trend
* Greek politics, banking risks weigh going forward
By Marius Zaharia
LONDON, May 15 (Reuters) - Implied euro zone interbank rates fell on Tuesday after better than expected German economic data, but they are likely to resume their week-long rising trend soon as the Greek crisis moves towards a showdown.
The December Euribor contract rose 3.5 ticks at 99.345 after Germany squashed fears that it was in recession, posting a 0.5 percent rise in the first quarter. This implies the three-month benchmark Euribor rate is expected to fix at 0.655 percent at the end of the year.
But this compares with expectations of 0.53 percent before the Greek elections earlier this month and analysts expect it to soon reflect bets that Euribor will be higher at the end of the year than Tuesday's fixing of 0.687 percent.
That prices in growing risks of a counterparty defaulting as opposition to bailout terms gathers momentum in Greece, increasing the threat of the country dropping out of the euro zone with damaging repercussions throughout the banking system.
Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, dismissed on Monday the prospect of a Greek euro exit as "propaganda".
"The German GDP surprised on the upside, Mr. Juncker tried to make us believe that a Greek exit was not discussed at the Eurogroup meeting and Moody's downgrade for Italian banks was expected," said Vincent Chaigneau, head of fixed income strategy at Societe Generale.
"The news this morning was a bit less dramatic, but the situation remains quite tense," he said, adding that he saw room for Euribor futures to fall further."
From a technical perspective, the December Euribor meets support at May and late April lows of 99.29-99.30, which if broken could pave the way to mid-March lows of around 99.20 - also the 38.2 percent Fibonacci retracement of the rally from late-November.
EXPOSED TO MORE DOWNGRADES
While Moody's downgrade of Italian banks late on Monday was largely priced in, concerns remain about soaring bad loans in countries like Italy or Spain, which are hit by recession and austerity.
In particular, some market participants expect Spanish banks to need generous capital help from the government and say this may force the sovereign to seek outside help as well.
"The key driving force is not only the Greek situation but also the situation of the European banking system which is exposed to other downgrades," BNP Paribas rate strategist Patrick Jacq said.
He said that the large excess liquidity in the system and expectations that the European Central Bank will maintain interest rates low for a long period should keep forward euro overnight Eonia rates subdued.
This would push the Euribor/Eonia and Libor/Eonia spreads - used for gauging money market stress - wider in the near future.
ECB meetings are going to be decisive for the trend of those spreads. Any sign that the central bank is willing to introduce additional monetary easing measures would calm down interbank markets and trigger a rally in Euribor futures.
"If the ECB takes more non-standard measures ... there will be relief and possibly push those ... (spreads) tighter, but the next ECB meeting is three weeks away and in the meantime what is going to dominate is the sovereign situation and concerns about banks," SocGen's Chaigneau said.
"So for the next couple of weeks the risk would be for widening of the spreads and a fall in futures." (Graphics by Scott Barber; Editing by Ruth Pitchford)
- Tweet this
- Share this
- Digg this