Key Euribor rate highest in over a month, Dexia weighs

FRANKFURT: Key euro-priced bank-to-bank lending rates remained at the highest in over a month on Tuesday, as money market tensions outweighed an expected new wave of liquidity support from the European Central Bank and possible interest rate cuts.

ECB policymakers have delivered mixed messages on the possibility of cutting interest rates in recent days, but have been near-united in signalling they are prepared to offer at least one round of ultra-long 12-month funding.

This comes as new fears grip financial markets. Worries that Franco-Belgian bank Dexia could be crippled by Greece's debt problems rattled the euro and stock markets anew on Monday, piling more misery on the crisis-strained bloc.

Despite the prospect of additional cheap ECB money coming down the pipe, and already-heavy excess liquidity putting downward pressure on rates, key three-month Euribor rates were unchanged at 1.557 percent.

Three-month Euribor rates are traditionally the main gauge of unsecured interbank euro lending and they are a mix of interest rate expectations and banks' appetite for lending

Six-month Euribor softened to 1.756 percent from 1.757 percent, while 12-month rates dipped to 2.083 percent from 2.085 percent.

Shorter-term one-week rates, which are most heavily influenced by excess liquidity levels, moved in the opposite direction, dropping to 1.184 percent from 1.197 percent. Excess liquidity levels currently stand at over 200 billion euros according to Reuters calculations.

Overnight rates fixed at 1.071 percent, down from 1.463 percent the previous day.

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

For the second day running on Tuesday, over 1.3 billion euros was taken from the ECB's so-called 'emergency' overnight facility.

Banks also took almost 200 billion euros at the ECB's regular weekly refinancing operation, adding to the meaty 140 billion euros taken in three-month funding last week.

The deepening crisis has already forced the ECB back into emergency mode. It has 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.

Following a string of hints from policymakers, markets now expect it to also reintroduce ultra-long term 1-year funding.

The central bank is also buying sovereign bonds again, although data on Monday showed it slowed purchases last week.

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

Copyright Reuters, 2011