FRANKFURT: Euro zone banks' demand for European Central Bank weekly funding hit a new two-year high on Tuesday, as the euro zone's debt crisis continued to paralyse the traditional bank-to-bank lending market.
A total of 192 banks took a combined 265.5 billion euros at the ECB's once-a-week handout of limit-free seven-day loans. The amount tops the 247 billion that 178 banks took last week and is the second week running that demand hit a new two-year high.
The ECB will also offer 3-month money on Wednesday, with analysts in a Reuters poll expecting banks to take 50 billion euros in that tender.
Intensifying fears about the financial health of Italy and Spain have continued to hurt the interbank money market over the last fortnight as banks have further scaled down the list of peers to which they are prepared to lend.
Italy was forced on Tuesday to pay euro-era record yields of over 7 percent on its three and 10-year government bonds but sold 7.5 billion euros of the bonds, close to its maximum target level of 8 billion euros.
Since late 2008 the ECB has offered euro zone banks unrestricted access to loans. While the tactic has prevented a full scale meltdown of the banking sector, it cannot help overcome the current fear gripping the bloc.
The intensifying worries have been pushing up the price at which banks -- if at all -- are prepared to lend to each other.
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, remained at 1.477 percent on Tuesday.
Other rates dipped. Six-month rates edged down to 1.707 percent from 1.705 percent while 12-month rates eased to 2.042 percent from 2.044 percent.
Shorter-term one-week rates -- most heavily influenced by excess liquidity, which currently stands at a hefty 271 billion euros according to Reuters calculations -- inched down to 0.905 percent from 0.909 percent.
Overnight rates fell to 0.713 percent from 0.730 percent.
People familiar with the matter told Reuters last week that the European Central Bank was looking at extending the term of loans it offers banks to two or three years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy.
The market turmoil has also increased belief that the ECB will cut rates for the second month running next month, back to a record low of 1.0 percent.
The ECB has already reinstated some of its most potent crisis-fighting tools in recent months in a bid to ease tensions, including ultra-long, limit-free one year liquidity injections. But the moves have done little to revive interbank lending.
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