Euribor 3-month flat as markets eye Greece, Italy

FRANKFURT: Key euro-priced bank-to-bank lending three-month rate was flat on Wednesday as excess liquidity neutralised the upward pull of the sovereign debt crisis giving banks caution in their lending.

Greek Finance Ministry said "satisfactory progress" was being made and 'Troika' inspectors were due to return to Athens next week.

EU finance ministers made clear to Greece over the weekend that it must meet targets to get fresh funds, but broke no new ground in dealing with the debt crisis shaking the euro zone.

Standard and Poor's cut Italy's sovereign ratings by one notch on Tuesday and traders said the European Central Bank was in the market buying Italian bonds.

The ECB signalled a shift in its interest rate policy earlier this month, indicating further rate rises were off the agenda for now.

Euribor futures show markets now see a good chance the ECB could cut rates as early as next month, but ECB Governing Council member Ewald Nowotny said on Tuesday the central bank's room to move was limited.

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 -- remained at 1.537 percent.

Shorter-term one-week rates ticked up to 1.140 percent from 1.138 percent. Overnight rates fixed at 1.061 percent on Tuesday.

Six-month Euribor rates dipped slightly to 1.736 percent from 1.737 percent, while 12-month rate was flat at 2.065 percent.

Huge amounts of excess liquidity -- currently 154 billion euros, according to Reuters calculations -- also put downward pressure on markets.

Last week five major central banks teamed up to cooperate in offering three-month dollar loans to commercial banks to prevent money markets from freezing up in the wake of Europe's debt crisis.

The move came after downgrades to some of Europe's major banks and after two undisclosed banks tapped the ECB for dollar funding, the second time in a month the expensive facility has been called upon.

The worsening euro zone debt crisis has seen many banks stock up on ECB euro funding. They took 164 billion euros in one-week funds last week, well above the 135 billion traders had expected, and added an extra 54 billion in one-month liquidity.

The deepening crisis has already forced the ECB back into emergency mode. Last month it reintroduced six-month euro funding, a measure it had previously mothballed, and extended limit-free funding in all its lending operations up until mid-January.

The central bank is also back buying sovereign bonds again. It has spent roughly 80 billion euros since reactivating the 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