Money markets stress indicators edge higher on greece concerns

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* FRA/OIS spreads, euro/dollar FX swaps widening * Markets wary of Greece, but no panic yet as ECB loans help * But impact of potential Greek euro exit unknown By Marius Zaharia LONDON, May 9 The election of mainly anti-austerity politicians in Greece has pushed some euro zone money market stress indicators higher, although there was no sense of panic as most banks have already secured the cash they need for this year. Politicians who back the reforms agreed with Greece's international lenders have failed to form a government, and the political deadlock raises the risk of a full-blown Greek default next month and, some say, a potential euro zone exit. With the exact consequences of such an unprecedented event hard to predict, some closely watched interbank stress indicators have started to tick up. The difference between forward rate agreements (FRA) and overnight index swaps (OIS) - one way to focus in on counterparty risk - has risen across the curve this week. Longer-term maturities have risen more than short-term ones. Markets saw little risk of banks facing liquidity problems in the near term, as they have borrowed a total of about 1 trillion euros in long-term loans from the European Central Bank. The two-year spread was about 37 basis points, compared with 32 at the end of April. "Speculative positions in funding markets have been increasing in the last week or so and they should continue to put widening pressure on spreads like FRA/OIS and cross currency basis," said Max Leung, a rates strategist at BofA Merrill Lynch Global Research. "The real concerns (surrounding Greece) are not on the banking sector yet. In addition, there are still plenty of measures that the ECB and the Fed have in place that are shielding the banking sector from the political uncertainty." The Markit iTraxx index of default insurance for European senior financials hit its highest since mid-January on Wednesday at 268.94 basis points. That was still 100 bps lower than the highs hit before the ECB's cash injections. CROSS CURRENCY Another widely used gauge of interbank stress, the three-month euro/dollar cross currency basis swap , hit its widest levels in two weeks at minus 52 basis points. The measure, which widens when banks find it harder to borrow dollars, has been on a steady narrowing trend since the ECB's first liquidity injection in the banking sector late last year. This week, however, it has widened by 6 basis points. "There has been a little bit of movement, but there's nothing yet to suggest significant changes are taking place," said Ian Stannard, head of European FX strategy at Morgan Stanley. Stannard said the Greek political situation and uncertainties related to a broader increase of support for growth-oriented measures rather than austerity across Europe was behind the widening. But a break to levels wider than minus 60 basis points was needed to confirm a change in the overall trend, he said. "At the moment the basis is reflecting some of the uncertainty but nothing more than that." A Greek default in itself would have limited impact on the banking sector outside Greece, analysts say. Some Greek banks may lose access to the ECB's emergency liquidity measures as a result. But other banking systems have mostly written down their Greek holdings and would still be able to tap ECB funds if needed. If it becomes more apparent that Greece is heading towards a euro exit, however, stress is likely to increase sharply, as the exact consequences on the euro zone banking system are unknown. "Another Greek default may not be a Lehman-type event, but a potential Greek exit could be," BofA Merrill Lynch's Leung said.