Euro interbank lending rates marched higher as markets continued to digest last week's inflation warning from the European Central Bank and factor in earlier interest rate rises than previously anticipated. Meanwhile, Spain was close to finalising plans for a second round of re-capitalisation for its troubled savings banks, officials said on Thursday, a move analysts said could allow them access to normal funding channels.
The ECB kept interest rates on hold at a record low of 1 percent last week, but warned the eurozone faces short-term price pressures - taken by some in financial markets as a sign it could raise rates earlier than previously thought. Markets now expect one 25 basis point rate hike by year-end, according to BNP Paribas, compared with the end of the first quarter of 2012 a month ago.
Benchmark three-month euro Libor rates rose to 0.94938 percent. Spain's government, which is hoping the country's regional banks can raise funds from private investors, will announce a re-capitalisation plan once the lenders detail their full exposure to the collapsed property sector in coming weeks, a government source said on condition of anonymity.
"There is certainly a lot of nervousness about the Spanish banking sector, which is probably somewhat exaggerated," said Societe Generale's chief European economist Klaus Baader. Spanish banks borrowed 70 billion euros ($94.14 billion) from the ECB in December, up from 64.5 billion in November, although some of the extra demand likely came from the need to secure funding to cover the year-end period. Spanish banks face 27.5 billion euros of bond redemptions in the first half of the year, according to Societe Generale, with recent debt issues suggesting it is becoming more expensive to raise funds. A eurozone source said the bloc was considering allowing the European Financial Stability Facility (EFSF) to buy back the bonds of member states in trouble as part of a broader response to the sovereign debt crisis.