Eroding trust between banks lifts Euribor rates

Key euro-priced bank-to-bank lending rates edged higher on Friday as increasing jitters about the health of European banks reduced their willingness to lend to each other outweighed an incoming wave of central bank liquidity support.
Banks could be hit hard were Greece to default on its debt, and fears about the damage could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May.
Officials said on Wednesday euro zone countries will ask banks to accept losses of up to 50 percent on their holdings of Greek debt as part of a plan to avert a disorderly default. In response to intensifying euro zone troubles, the European Central Bank last week reinstated some of its most potent crisis-fighting tools, including 1-year liquidity injections.
The moves are expected to keep the euro money market heavily over supplied with liquidity for the foreseeable future and thereby maintain downward pressure on interbank lending rates. Banking sector tensions, highlighted by the rescue of Franco-Belgian lender Dexia SA this week, and fears Greece's debt problems may spark a new wave of losses for banks, continue to outweigh the new support, however.
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, rose to 1.574 percent from 1.572 percent. Six-month Euribor rates also rose, climbing to 1.777 percent from 1.775 percent, while 12-month rates increased to 2.115 percent from 2.111 percent.
Shorter-term one-week rates, normally the most heavily influenced by excess liquidity, bucked the trend, dropping to 1.174 percent from 1.181 percent. Overnight interest rates on Thursday fell to 0.958 percent from 0.986 percent the previous day. Bank overnight deposits at the ECB rose to 123 billion, showing that banks are willing to accept a lower interest rate at the central bank rather than lend to each other. Money markets are already well overstocked with ECB funding. Excess market liquidity rose to 233 billion euros on Friday, according to Reuters calculations, the highest level since the end of June last year.