Euribor rates up amid growing concern about economy

A worsening euro zone debt crisis and fears a recession is looming have seen money markets lock up again and prompted banks to stock up on limit-free ECB funding, pushing liquidity back to exceptionally high levels.

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 -- rose despite the cash overhang on Tuesday to 1.536 percent from 1.534 percent.

Six-month Euribor rates increased to 1.739 percent from 1.734 percent, while longer-term 12-month rates rose to 2.075 percent from 2.070.

Shorter-term one-week Euribor rates bucked the trend, falling to 1.119 percent from 1.123 percent, still well below the ECB's official 1.5 percent interest rate. Overnight rates fixed at 0.908 percent on Monday, up from 0.890 percent.

Banks took 134 billion euros in the ECB's latest handout of 7-day funding on Tuesday, slightly below expectations of 140 billion, but against the ECB's calculation that markets are already oversupplied to the tune of 107 billion euros.

The escalation of money market tensions has been highlighted after the ECB's usually well-overpriced dollar funding facility was tapped last week for the first time since February.

Earlier this month the central bank also reintroduced six-month funding, a crisis tactic it previously retired, while it also extended limit-free funding in all its lending operations up until mid-January.

Most significantly, it has also started buying of sovereign bonds again. It bought 14.2 billion euros last week figures on Monday showed having bought a record 22 billion euros the week before.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and also see around a 30 percent chance that the bank may be forced to cut rates.

Copyright Reuters, 2011