Bank-to-bank lending rates marched higher on Monday as Germany dampened hopes European policymakers would soon deliver a comprehensive solution to the eurozone debt crisis, and said banks should write down more of their Greek debt holdings. While some gauges of market strain - such as the three-month premium paid over anticipated central bank rates - held steady, interbank lending remained sparse and limited to very short maturities, traders said.
Riskier assets such as equities rose earlier on Monday after a meeting of finance ministers from the world's 20 leading economies piled pressure on European leaders due to meet on Sunday to decisively tackle the two-year debt crisis. German officials played down expectations, with a government spokesman warning against unrealistic "dreams" the summit would deliver a definitive plan. German Finance Minister Wolfgang Schaeuble also cautioned against unrealistic hopes.
Eurozone policymakers' expected measures to try and solve the debt crisis are likely to see banks take a hit, and fears about the damage this could inflict on the financial system have driven market volatility since July. In the unsecured lending market, London interbank offered rates for three-month euros rose to fresh nine-week peaks of 1.50750 percent. The equivalent Euribor rate was also higher as banking sector tensions outweighed a glut of excess liquidity swishing in the system. In a further sign of banks' reluctance to lend to each other, overnight deposits at the ECB - which pays a lower interest rate - rose to 136 billion euros from 123 billion the previous day.
Highlighting the extreme uncertainty over European banks' funding needs, forecasts in a poll for the ECB's first one-year tender in almost two years, due to be held next week, ranged from 10 billion euros to 150 billion euros. Excess market liquidity stands at 229 billion euros, according to Reuters calculations, just below Friday's level, which was the highest since the end of June last year.