-- The cost of swapping one-month euro funds into dollars at three-year high -- Rising dollar funding costs show banks scrambling for holiday cover -- Euro-zone crisis magnifying year-end funding pressures due to credit concerns (Rewrites throughout, adding quotes from analysts.) By William Kemble-Diaz Of DOW JONES NEWSWIRES LONDON (Dow Jones)--The short-term cost of dollar funding leapt to its highest level in three years Tuesday as credit concerns continued to intensify in Europe and banks scrambled to cover themselves for the holiday period. In a sign that seasonal year-end funding pressures are being distended by the euro-zone sovereign debt crisis, the implied one-month euro-dollar basis, which tracks the cost of swapping one-month euro funds into dollars, sank as much as 34 basis points to as low as minus 139.5 basis points, interdealer broker ICAP said. That was the lowest since November 2008 and occurred as the end-date for one-month forward foreign-exchange prices was pushed forward to Jan. 3, 2012, due to seasonal holidays. "Funding is a very real issue for banks over quarter turns and this counts double at least over year-turns when balance sheet concerns are compounded by very thin holiday markets during which financial institutions are loath to find themselves short of funds," ICAP strategist Chris Clark said. "This is a regular thing and tends to affect all lending markets every year--only these days such concerns are somewhat magnified." The implied cross-currency basis swap is a function of spot and forward foreign-exchange prices as well as benchmark interbank interest rates in each currency. A rate of zero implies the balance of demand for each currency is equal and that the market is willing to swap currencies at the prevailing interbank rates. However, the deepening of the euro-zone sovereign debt crisis and concerns over the creditworthiness of the region's banks because of their heavy sovereign bond holdings means European banks are being forced to lend euros at ever-lower interest rates to get dollars in return. On Tuesday, the implied discount on the rate banks charge each other to lend euros for a period of just one month was as big as 1.395%. With the one-month euro Interbank Offered Rate, also known as Euribor, fixed at 1.21%, that meant some European banks were now willing to pay their market counterparties to borrow euros to get dollars in return. "It is a very worrying signal because it is showing that the credit quality of these European institutions is so weak that even though there is so much availability of liquidity in the system they are having to pay up for it," said a foreign exchange and rates strategist at a U.S. bank, who declined to be named. The cost of insuring European banks against default has risen markedly since the summer. Major banks from Germany, France, Italy and Spain saw their five-year credit default swaps hit records last week, according to data provider Markit. "As this continues to worsen and continues to show stress, that is just going to portend a weaker environment overall," the strategist said, while playing down the potential for a system-wide credit crunch, partly thanks to the emergency dollar-funding facilities that central banks have in place and to which banks may increasingly be forced to turn. -By William Kemble-Diaz, Dow Jones Newswires; 44-20-7842-9347; william.kemble-diaz@dowjones.com

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