Euribor rates edge up as larger debt writedowns loom

FRANKFURT: Key euro-priced bank-to-bank lending rates edged higher on Monday after European leaders at the weekend neared agreement on bank recapitalisation, while sharp differences remained over plans to write down Greek government debt.

European leaders plan to deliver final decision at a second summit on Wednesday and private bondholders are readying themselves for steeper losses on their Greek debt holdings as the country's economic outlook takes a turn for the worse.

Fears that the debt crisis could cripple some of Europe's biggest banks has severely reduced money market trading and left many banks in debt-strained euro zone countries frozen out of open markets and reliant on the ECB for funding.

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 up to 1.588 percent from 1.585 percent, highest since early August.

Six-month Euribor remained unchanged at 1.785 percent and longer-term 12-month rates ticked down to 2.121 percent from 2.122 percent.

Shorter-term one-week rates dipped to 1.153 percent from 1.158 percent, while overnight interest rates inched up to 0.937 percent on Friday.

Failure by the euro zone to come up with a solid and credible solution to its problems would further undermine financial markets' already shattered confidence in the currency bloc and its ability to get on top of a two-year-long debt crisis.

Bank overnight deposits also underscore the tensions in the money market. Banks parked 202 billion euros at ECB overnight, showing that banks are willing to accept a lower interest rate at the central bank rather than lend to each other.

The use of the emergency overnight lending facility remained elevated at 4.6 billion euros.

In response to the troubles, the European Central Bank has reinstated some of its most potent crisis-fighting tools earlier this month, including 1-year liquidity injections, although the moves have done little to encourage banks to start lending to each other again.

It will hold the first of two promised 1-year lending operations on Tuesday.

Money markets are already well overstocked with ECB funds. Excess market liquidity stands at 209 billion euros, according to Reuters calculations.

The ECB's liquidity measures are expected to keep the euro money market heavily oversupplied with liquidity for the foreseeable future, however, and maintain downward pressure on interbank lending rates.

At the ECB's latest offering of weekly loans, banks took 201 billion euros, down from 205 billion the previous week but in line with expectations.

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

Copyright Reuters, 2011