Money markets shorter term funding measures rise on greece

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NEW YORK, May 15 Some shorter-term funding markets are reflecting rising strain in bank borrowing rates as concerns of a Greek exit from the euro increase, although funding costs remain below levels reached late last year. Europe's debt crisis has flared up on risks Greece could exit the euro zone. At the same time, Moody's Investors Service is conducting credit rating reviews expected to lead to widespread downgrades of regional and global banks. That is expected to increase some funding costs and send some subordinated bank bonds in Europe into junk territory. "There has been heightened risk in slightly longer term funding," said Ira Jersey, an interest rate strategist at Credit Suisse in New York. He noted that concerns are reflected "on a forward basis, not really now." Two-year interest rate swap spreads, a proxy for bank counterparty risk, reached their widest since January 10 on Tuesday, widening three quarters of a basis point to 38.25 basis points. The spreads have widened from 27.75 basis points at the beginning of May. The Libor-OIS spread, or FRA/OIS spread, for contracts that mature in early 2013 also rose to 50.2 basis points, up from 49.3 basis points on Monday and an increase from 41.6 basis points a week ago. This spread is seen as a gauge of banks' reluctance to lend. Other short-term funding indicators were relatively stable as central bank loan operations continue to support banks for the near term. The European Central Bank has loaned over 1 trillion euros in three-year loans to banks as part of its Long Term Refinancing Operation (LTRO). The liquidity injection has eased much of the funding concerns that hurt banks late last year. "Banks in Europe still have a ton of cash held over from the LTRO so it's not like there are a lot of funding needs, so therefore the risk of a near term default," said Jersey. The three-month London interbank offered rate was unchanged on Tuesday at 0.46585 percent, down from 0.46685 percent late last week.