High excess liquidity pulls down Euribor rates

Excess liquidity in the money markets rose slightly to 167 billion euros, its highest level since July 2010, Reuters calculations showed. Worried by the debt crisis, banks are hoarding cash and funds are not circulating in a regular fashion in the euro zone.

Banks took 148 billion euros in the ECB's handout of 7-day funding on Tuesday, in line with expectations.

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 -- eased to 1.535 percent from 1.536 percent the previous day.

Six-month Euribor rates edged down to 1.740 percent from 1.741 percent, while longer-term 12-month rates fell slightly to 2.078 percent from 2.080 percent.

Shorter-term one-week Euribor rates -- most heavily influenced by excess liquidity -- fell to 1.133 percent from 1.140 percent, further below the ECB's main rate of 1.5 percent. EONIA overnight interest rates fixed higher at 0.885 percent on Monday.

The fact that banks are awash with cash after the European Central Bank's six-month tender last week is helping offset market tensions over the reliance of French banks on short-term funding markets.

The ECB has also been buying sovereign bonds to tackle the euro zone debt crisis and spent a record 22 billion euros on government debt last week.

Euribor futures show markets have priced out further ECB interest rate hikes well into future.

With the debt crisis continuing to roil the bloc, the central bank continues to offer limit-free funding to banks, a promise that currently runs to mid-January.

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

Copyright Reuters, 2011