Libor Rises Again, As European Jitters Resume, Europe Blasts Moody's Downgrade; ECB Now To Impose 5% Haircut On Greek Collateralized Bonds

The primary indicator used by Jim Caron in his daily letter to assuage client fears about contagion, 3 month Libor, has taken a step for the worse. As Market News reports: "Dollar and euro 3-month LIBOR both rose Tuesday, with the dollar rate at its highest since July 6 last year and the euro rate at its highest since Dec 29 2009. The euro overnight LIBOR rate rose 32.13 basis points, due to the end of the European Central Bank maintenance period, while the 3-month LIBOR rate was up 0.19 points." Adding to increasing short term funding concerns was the fact that going forward the ECB will take a 5% haircut on all Greek bonds posted as collateral with the ECB. As this amount has surged recently, Greece will be now forced to post yet more bonds just to cover the spread. Luckily, Greece is allowed to post any collateral at all, as the once-prudent ECB now allows for any worthless collateral to be pledged for cash on its balance sheet. Very much like our own Fed. Lastly, yesterday's Greek downgrade by Moody's drew harsh criticism by Europe. As Reuters reports: "Moody's decision came at quite an astonishing and unfortunate moment" according to Olli Rehn, who added "the downgrade had not taken into account latest developments in Greece." On the other hand, seeing how much credibility (none) the Greek government has, after having been caught lying about its deficit for years, is this really a surprise?

More on overnight funding troubles from Market News:

The Spanish banking sector has been in the spotlight, with reports of liquidity drying up for the Spanish Caja banks and with downbeat comments from government officials.

The trend of European borrowers being charged high by dollar lenders, who are concerned about the fragility of sectors of the EU banking system, remains in place.

Euro 3-month LIBOR/OIS spreads, however, narrowed just over 0.1 basis points Tuesday while dollar spreads widened 0.3 basis points and dollar spreads widened just under 0.2 basis points.

And some more on Europe's response to Moody's being just 6 months behind the curve this time:

"Moody's decision does not in anyway take into account Greek commitments or the negative consequences, which were considerably reduced following the adoption of the (bailout) programme," Rehn said.

He added that he had discussed the matter with EU Commission President Jose Manuel Barroso and Internal Markets Commissioner Michel Barnier, saying that the move "revived the debate over the issue of ratings agencies".

"The Commission is going to look into the question of competition in this sector, where there is a very strong concentration (of players). We are also going to look into transparency in the methodolgy and the question of conflict of interest," he added.