Euribor rates rise on funding worries

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 to 1.531 percent from 1.529 percent.

Six-month Euribor rates rose to 1.734 percent from 1.729 percent, while 12-month rates ticked up to 2.066 percent from 2.058 percent.

Shorter-term one-week rates bucked the trend falling to 1.089 percent from 1.094 percent after banks borrowed more heavily than expected from the ECB weekly funding operation.

Excess liquidity is a hefty 146 billion euros, according to Reuters calculations , tempering the rise in market interest rates.

Overnight rates on Wednesday fell to 0.930 percent from 1.214 percent. They typically spike at the beginning of new ECB's reserves period, and are now back on their way down.

The worsening euro zone debt crisis and fears a return to recession is looming, have seen money markets ice up again and forced many banks to stock up on ECB funding.

They took 164 billion euros in one-week funds from the ECB, well above the 135 billion traders had expected, and 54 billion in a one-month liquidity operation.

On Wednesday, two undisclosed banks tapped the ECB for dollar funding, the second time in a month the expensive facility has been called into action.

The intensification of the crisis has already forced the ECB back into emergency mode. Last month it reintroduced six-month funding, a measure it had previously mothballed, and extended limit-free funding in all its lending operations up until mid-January.

Last week it also signalled a shift in its interest rate policy, unceremoniously abandoning its rate hike ambitions.

Euribor futures show markets now see a good chance the ECB may revert back to rate cuts as early as next month.

It is also back buying sovereign bonds again. It has spent roughly 70 billion euros since reactivating the purchases early last month, which now include the bonds of Italy and Spain, two of the euro zone's biggest economies.

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

Copyright Reuters, 2011