Euribor rates ease in liquidity flooded markets

FRANKFURT: Key euro-priced bank-to-bank lending rates fell slightly on Wednesday as an ECB-fuelled liquidity overhang in the money market overpowered fresh euro zone debt fears after Greece promised to put its latest bailout deal to a public vote.

Excess liquidity in the euro money market currently stands at 202 billion euros according to Reuters calculations, following a string of limit-free cash injections of long-term funding from the European Central Bank.

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, inched down under the weight of the money to 1.584 percent from 1.585 percent.

Rates in longer maturities followed suit. Six-month Euribor fell to 1.780 percent from 1.782 percent while longer-term 12-month rates eased to 2.109 percent from 2.111 percent.

Shorter-term one-week rates , traditionally the most influenced by excess market liquidity, remained unchanged at 1.134 percent, well below the ECB's 1.5 percent headline interest rate. Overnight rates fixed lower at 0.872 percent on Tuesday, down from 0.937 percent.

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.

Bank overnight deposits at the ECB also underscored the tensions dominating money markets. Banks parked over 229 billion euros at the central bank overnight rather than risk lending it on.

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.

The bank is expected to keep interest rates at 1.5 percent when it meets on Thursday.

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

Copyright Reuters, 2011