Euribor rates edge up in wake of EU meeting

FRANKFURT: Key euro-priced bank-to-bank lending rates edged higher on Monday as concerns about the ability of the euro zone to tackle the sovereign debt crisis continued to weigh on money markets.

EU finance ministers made clear to Greece over the weekend that it must meet targets to get fresh funds but broke no new ground in dealing with the debt crisis shaking the euro.

The three-month Euribor rate -- traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending -- ticked up to 1.536 percent from 1.535 percent.

Shorter-term one-week rates followed suit, rising to 1.125 percent from 1.111 percent. Overnight rates fixed higher than that on Friday at 1.112 percent.

Longer-term rates bucked the trend. Six-month Euribor rates eased slightly to 1.735 percent from 1.736 percent, while 12-month rates fell to 2.064 percent from 2.068 percent.

The rises come despite huge amounts of excess liquidity -- currently 147 billion euros, according to Reuters calculations -- putting downward pressure on markets.

On Thursday a group of five major central banks teamed up in a bid to head off a build-up of tensions in dollar money markets, a move which will see European banks offered a trio of 3-month dollar injections.

It came after downgrades to some of Europe's major banks and after two undisclosed banks tapped the ECB for dollar funding, the second time in a month the normally expensive facility has been called into action.

The worsening euro zone debt crisis has seen many banks stock up on ECB euro funding. They took 164 billion euros in one-week funds last week, well above the 135 billion traders had expected, and added an extra 54 billion in one-month liquidity.

The intensification of the crisis has already forced the ECB back into emergency mode. Last month it reintroduced six-month euro funding, a measure it had previously mothballed, and extended limit-free funding in all its lending operations up until mid-January.

It has also signalled a shift in its interest rate policy, unceremoniously abandoning its rate hike ambitions.

Euribor futures show markets now see a good chance the ECB may revert back to rate cuts as early as next month.

It is also back buying sovereign bonds again. It has spent roughly 70 billion euros since reactivating the purchases early last month, which now include the bonds of Italy and Spain, two of the euro zone's biggest economies.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 0900 GMT.

Copyright Reuters, 2011