Money markets: Banks take less ECB cash as Greek strains ease

Banks' demand for European Central Bank's weekly loans fell on Tuesday as the end of the reserve maintenance period looms and money market tensions eased after Greece moved to secure its next slice of international aid to avert a near-term default. Banks exceeded their funding requirements in the first three weeks of the maintenance period, with demand for the ECB's 7-day funds hitting a four-month peak two weeks ago as they sought a liquidity buffer against the swirling Greek debt crisis.
On Tuesday, they bid for 120 billion euros of 7-day funds at the ECB's weekly tender, 21 billion euros less than the amount of loans expiring, and down from 187 billion euros the ECB allocated on June 21. The decline in liquidity needs for reserve requirement meant excess liquidity in the system was still ample enough to drive down key overnight rates in the coming week, strategists said.
"The liquidity needs on the current account are significantly declining so it makes sense to see demand declining ... For the last week of the reserve period, conditions will probably be easier," said Patrick Jacq, an interest rate strategist at BNP Paribas. Overnight Eonia could decline close to 0.75 percent for the last week of the ECB's reserve period, Jacq said, having fixed at 0.815 percent on Monday, given excess liquidity still above 30 billion euros, according to Reuters calculations.
Morgan Stanley strategists estimate excess liquidity will rise to 82 billion euros in the coming week given the dwindling reserve requirements, putting downward pressure on Eonia to fall further below the ECB refi rate currently at 1.25 percent. "The last time we had excess liquidity this high was at the end of the January reserve period, where EONIA fixed as low as 65 basis points below the refi rate, and EONIA averaged 45 bps below refi during that week," they said. While overnight rates were being driven primarily by the liquidity outlook, three-month euro-priced interbank rates edged higher on expectations that the ECB will raise interest rates to 1.50 percent on Thursday.
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 1.568 percent from 1.563 percent, its highest in over 2-1/4 years. Equivalent Libor rates were fixed up at 1.51438 percent from 1.50625 percent on Monday.