Euribor rates steady, markets await crisis response

FRANKFURT: Key euro-priced bank-to-bank lending rates steadied on Tuesday after Germany tempered hopes that an EU summit next Sunday would produce a cure for the euro zone debt crisis and money market traders began looking to the ECB to cut rates instead.

Overnight interest rates on Monday dipped to 0.928 percent from 0.930 percent the previous day and from 0.958 percent a session earlier after German Finance Minister Wolfgang Schaeuble said the summit would not yield a "definitive solution" for the crisis.

Three-month Euribor rates , traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, edged up on Tuesday to 1.579 percent from 1.578 percent.

Six-month Euribor rates eased to 1.78 percent from 1.782 percent, while 12-month rates fell to 2.117 percent from 2.122 percent.

Shorter-term one-week rates , normally the most heavily influenced by excess liquidity, dropped to 1.166 percent from 1.171 percent.

"Front-end Eonia got smashed yesterday after the Germans said there would be no end-product from the summit and Euribor has reacted with it," one money market trader said.

Tensions in the interbank market are high as euro zone leaders race to convince banks to accept "voluntary" writedowns of up to 50 percent on their sovereign holdings.

Bank overnight deposits at the ECB rose to 165 billion euros from 136 billion, showing that banks are willing to accept a lower interest rate at the central bank rather than lend to each other.

In response to intensifying euro zone troubles, the European Central Bank reinstated some of its most potent crisis-fighting tools earlier this month, including 1-year liquidity injections.

The measures are expected to keep the euro money market heavily over supplied with liquidity for the foreseeable future and maintain downward pressure on interbank lending rates.

Fears Greece's debt problems may spark a new wave of losses for banks, continue to offset the new support, however. The ECB has insisted it has reached the limits of its crisis response, though it did discuss cutting interest rates earlier this month before deciding not to.

Bank overnight deposits at the ECB rose to 165 billion euros from 136 billion, showing that banks are willing to accept a lower interest rate at the central bank rather than lend to each other.

Money markets are already well overstocked with ECB funds. Excess market liquidity stands at 225 billion euros, according to Reuters calculations, just below Friday's level, which was the highest since the end of June last year.

At the same time, and underscoring the nervousness that has paralysed the interbank market, emergency borrowing from the ECB has remained elevated over the last week.

Uncertainty created by the debt crisis has increased banks' reluctance to lend to each other and prompted many banks to stock up on ECB euro funding.

At the ECB's latest offering of weekly loans, banks took 201 billion euros, down from 205 billion the previous week but in line with expectations.

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

Copyright Reuters, 2011