ECB liquidity cannons push down Euribor rates

FRANKFURT: Key euro-priced bank-to-bank lending rates fell on Tuesday as the huge liquidity overhang in the money market overpowered fresh euro zone debt fears after Greece promised to put the country's latest bailout deal to a public vote.

Excess liquidity in the euro money market currently stands at 212 billion euros following a string of limit-free cash injections of long-term funding from the European Central Bank.

The money is putting heavy downward pressure on bank-to-bank lending rates.

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, dropped to 1.585 percent on Tuesday, from 1.591 percent.

Rates in longer maturities followed suit. Six-month Euribor fell to 1.782 percent from 1.788 percent while longer-term 12-month rates sank to 2.111 percent from 2.121 percent.

Shorter-term one-week rates , traditionally the most influenced by excess market liquidity, also fell, inching down to 1.134 percent from 1.136 percent. In contrast overnight rates fixed higher at 0.937 percent on Monday.

Worries over the euro zone debt crisis, and its impact on banks, continue to weigh against the current heavy overhang of money market liquidity, provided mainly by the ECB.

In the early hours of Thursday, European leaders made progress on their plans to recapitalise banks and scale up the size of the euro zone's 440 billion euro bailout fund although question marks remain over whether it will be enough to bring the debt crisis under control.

Bank overnight deposits at the ECB also underscored the tensions dominating money markets. Banks parked over 216 billion euros at the central bank overnight rather than risk lending it on.

The use of the ECB's emergency overnight lending facility also remained elevated at 3.261 billion euros, figures showed.

The central bank reinstated some of its most potent crisis-fighting tools last month, including one-year liquidity injections, although the moves have done little to encourage banks to start lending to each other again.

The ECB's liquidity is expected to keep the euro money market heavily over supplied with liquidity for the foreseeable future and maintain downward pressure on interbank rates.

At the ECB's latest offering of weekly loans, banks took 182 billion euros, down from 197 billion euros the previous week.

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

Copyright Reuters, 2011