Euribor rates inch up amid concern about euro future

FRANKFURT: Key euro-priced bank-to-bank lending rates edged up on Tuesday amid growing concern about the future of the euro zone in spite of high amounts of excess money market liquidity.

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 -- rose to 1.528 percent from 1.527 percent on Monday.

Six-month Euribor rates inched up to 1.724 percent from 1.723 percent, while 12-month rates ticked up to 2.052 percent from 2.051 percent.

One-week Euribor rates , most sensitive to the ECB's reserves cycle and excess liquidity -- currently at a hefty 118 billion euros according to Reuters calculations -- rose to 1.098 percent from 1.096 percent.

Overnight rates rose to 0.857 percent from 0.850 percent, but are still well below the ECB's 1.5 percent headline interest rate.

The worsening euro zone debt crisis and fears a return to recession is looming, have seen money markets ice up again.

The reaction from jittery banks has been to stock up on limit-free funding provided by the ECB in case they are forced into fresh writedowns. At the same time, so fearful are they about lending to their peers in the current environment, that many are parking the stockpiled cash straight back at the ECB each day.

Banks took 164 billion euros in one-week funds from the ECB, and 54 billion in a one-month liquidity operation.

A total of 198 billion was parked at the ECB overnight on Thursday, the highest since July 2010.

Back then, however, the central bank was lending over 630 billion euros to euro zone banks, having pumped three rounds of ultra-cheap 1-year liquidity into system. Now the total is a far-smaller 440 billion, suggesting current tensions are markedly higher.

The intensification of the crisis has already forced the ECB back into emergency mode.

Last month it reintroduced six-month funding, a measure it had previously mothballed, and extended limit-free funding in all its lending operations up until mid-January.

On Thursday it also signalled a major 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 about 70 billion euros since reactivating the controversial 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