Euribor rates rise as EU crisis talks stall

French President Nicolas Sarkozy and German Chancellor Angela Merkel held talks in Frankfurt on Wednesday in a bid to break a deadlock between the European leaders over how to increase the firepower of the region's bailout fund.

European Union leaders will meet for a summit on Sunday in Brussels and expectations are high that this time a breakthrough will be achieved.

Failure to do so would further undermine financial markets' already shattered confidence in the currency bloc and its ability to get on top of a two-year-long debt crisis, which threatens the long-term viability of the single currency.

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 1.584 percent from 1.582 percent.

Six-month Euribor rates rose to 1.785 percent from 1.783 percent, while 12-month rates ticked up to 2.123 percent from 2.122 percent.

Shorter-term one-week rates , the most heavily influenced by excess liquidity, bucked the trend and fell to 1.158 percent from 1.161 percent.

Overnight interest rates rose on Wednesday to 0.949 percent from 0.924 percent.

Money markets are currently well overstocked with ECB funds. Excess market liquidity stands at 218 billion euros, according to Reuters calculations, just below Friday's level, which was the highest since the end of June last year.

Markets have been on edge for fear European leaders may not be able to agree on a plan to address the bloc's debt crisis, which has already forced Greece, Ireland and Portugal to seek bailouts and is now bordering on Italy and Spain.

Further complicating the situation, Moody's said late on Monday it may put a negative outlook on France's Aaa rating in the next three months --a move which would make a downgrade more likely-- if slower growth and bank and euro zone bail out costs stretch its budget too much.

It also cut Spain sovereign credit ratings on Tuesday to A1 from Aa2, the third of the major agencies to lower its grade in recent weeks.

Tensions in the interbank market remain high as euro zone leaders race to convince banks to accept "voluntary" writedowns of up to 50 percent on their sovereign holdings.

Bank overnight deposits at the ECB rose to 182 billion euros, showing that banks are willing to accept a lower interest rate at the central bank rather than lend to each other.

In response to intensifying euro zone troubles, the European Central Bank reinstated some of its most potent crisis-fighting tools earlier this month, including 1-year liquidity injections.

The measures are expected to keep the euro money market heavily over supplied with liquidity for the foreseeable future and maintain downward pressure on interbank lending rates.

Fears Greece's debt problems may spark a new wave of losses for banks, continue to offset the new support, however. The ECB has insisted it has reached the limits of its crisis response, though it did discuss cutting interest rates earlier this month before deciding not to.

At the same time, and underscoring the nervousness that has paralysed the interbank market, emergency borrowing from the ECB has remained elevated over the last two weeks. It fell to a still-elevated 2.3 billion euros on Thursday.

Uncertainty created by the debt crisis has increased banks' reluctance to lend to each other and prompted many banks to stock up on ECB euro funding.

At the ECB's latest offering of weekly loans, banks took 201 billion euros, down from 205 billion the previous week but in line with expectations.

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

Copyright Reuters, 2011