Euribor rates inch up after Italy downgrade

FRANKFURT: Key euro-priced bank-to-bank lending rates edged up on Tuesday, reflecting growing concern about the future of the euro zone after a downgrade of Italy's credit rating and in spite of high amounts of excess money market liquidity.

Standard and Poor's cut Italy's sovereign ratings by one notch overnight and traders said the European Central Bank was in the market buying Italian bonds in small amounts and of targeted maturities of between five and 10 years.

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

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 1.537 percent from 1.536 percent.

Shorter-term one-week rates rose to 1.138 percent from 1.125 percent. Overnight rates fixed lower than on Monday at 1.041 percent.

Longer-term rates bucked the trend. Six-month Euribor rates rose slightly to 1.737 percent from 1.735 percent, while 12-month rates inched up to 2.065 percent from 2.064 percent.

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

Last week five major central banks teamed up to cooperate in offering three-month dollar loans to commercial banks to prevent money markets from freezing up in the wake of Europe's debt crisis.

The move 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 upon.

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 deepening 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, indicating further rate rises were off the agenda for now.

Euribor futures show markets now see a good chance the ECB could now cut rates, as early as next month.

The central bank 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