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Money markets ecb cash keeps pushing interbank rates lower


* Euribor, Libor rates keep falling on ECB cash bonanza* Lower state borrowing costs help as well* Any step back in fixing euro crisis could halt the trendBy Marius ZahariaLONDON, Feb 20 The prospect of another large ECB cash injection pushed euro-priced bank-to-bank lending rates to a new one-year low on Monday, a trend that should continue as long as efforts to cut debt and address the euro zone's structural flaws are sustained. Worries about euro zone banks' exposure to heavily indebted sovereigns such as Spain and Italy helped keep interbank lending rates elevated throughout 2011, but those concerns seem to be receding with states' borrowing costs. The game changer has been the 489 trillion euros worth of three-year loans that the European Central Bank pumped into euro zone banks in December. Banks are expected to take a similar amount of cash at another such liquidity operation on Feb. 29."There is this whole new world in which banks are more stable and as long as that's happening you get the fixings coming down," said RBC Capital Markets' head of European rates strategy Peter Schaffrik.

"You don't only have liquidity, but on top of that comes the sovereigns. The less shaky the sovereigns are, the better it is for the banking system. So what was a negative feedback loop at the end of last year turns now into a positive feedback loop."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, fell to 1.031 percent from 1.036 percent, hitting their lowest level since January last year. Equivalent Libor rates, fixed in London, dropped to 0.95750 percent from 0.96536 percent.

SLOWING DOWN Bank-to-bank lending rates have fallen by almost a third since late November. Even last week's worries that Greece might fail to reach a second bailout deal and head towards a disorderly default could not halt the trend, as the liquidity factors driving it were simply too strong, according to traders. The mood around Athens has since improved and Europe is expected to sign off on a second Greek bailout package later on Monday, leaving few obstacles in front of falling rates.

But with three-month Euribor rates now close to the ECB's key rate at 1 percent, some analysts expect the trend to lose some of its pace. Signs the euro zone economy is stabilising have also prompted economists to revise predictions the ECB will cut interest rates from a record low 1 percent, and a Reuters poll following this month's policy meeting saw little or no change this year. Barclays strategists expect the rate of decline to roughly halve to 0.4 basis points a day or less, settling at around 0.95 percent in mid-March and 0.80 percent by the summer. The falling trend in interbank rates is also driven by expectations that euro zone politicians will continue to pursue debt-cutting reforms and make progress on fixing the currency union's major flaws, such as the lack of fiscal unity. Any step back will heighten sovereign risks and reignite banking concerns as well, which could stop or even reverse the trend in lending rates, analysts say."If at some point European leaders decide that they've done enough, that would be a policy mistake," said Elwin de Groot, a senior market economist at Rabobank."The (three-year cash injection) is a liquidity solution and not a structural solution to systemic risks, which are much more linked to the flaws such as the lack of fiscal union. They have to make more advances there to cement the (trend)."De Groot said the floor for the current trend should be higher than levels seen before the euro zone crisis escalated. In April 2010, before Greece was given the first bailout, three-month euro Libor was fixing just below 0.60 percent, while Euribor fixings were a few basis points above that level.

Money markets ecb repayments point to more use of emergency funds


* ECB repayments indicate increased emergency funding* Reliance on some national central bank cash growingBy Kirsten DonovanLONDON, May 28 European Central Bank accounts for the last week are set to show banks made further early repayments of cash obtained through longer-term liquidity operations, highlighting the trouble some institutions are having funding themselves. More than 21 billion euros of longer-term refinancing operation (LTRO) cash was repaid last week, including around 9 billion euros of funds from December's three-year funding bonanza. That is on top of an almost 11 billion euro repayment earlier in May. But that fall in the outstanding amount corresponded with a rise in the ECB's balance sheet item that accounts for the Emergency Liquidity Assistance (ELA) funding provided by national central banks. The weekly balance sheet, published on Tuesday for the previous week, is expected to show a similar shift in funds.

Commerzbank rate strategist Benjamin Schroeder suggests this may be linked to credit rating agency Fitch's downgrade of Greek covered bonds to "junk" that made such paper ineligible as collateral at the ECB. Technically, banks are not permitted to repay LTRO funds early. There are exceptions for the December and February three-year funding operations, but even those officially cannot be repaid before one year has passed unless a bank runs out of eligible collateral or loses status as a ECB counterparty."You're getting this Balkanisation, where you're dividing up the risk and apportioning it through the national central banks," said RBS rate strategist Simon Peck.

"At the end of the day banks are getting the liquidity that they need, be it from the ECB or the ELA....but it just depicts the ongoing fragmentation that we have seen for some time now."National Central Banks are able to accept, at their own discretion, lower quality collateral than the ECB, allowing banks to acquire the funds necessary to keep operating. But that is not without its risks should the borrowers be unable to repay the cash.

"The concern is that...if the central bank has to mark this collateral to market (prices) it could be sitting on quite sizeable losses if the recipients of this funding can't repay it," said Rabobank rate strategist Richard McGuire."It gives the lie to the notion that the ELA lending is ringfenced and not a euro system liability...as the euro system would probably have to backstop those losses."The 11 billion euros of LTRO repayments earlier in the month were believed to be linked to the ECB's move to stop providing liquidity to Greek banks left temporarily undercapitalised after the Greek debt swap. The exact amount of funding taking place through regional ELAs is not definitively clear, but the ECB's balance sheet item reflecting it - other claims on euro area credit institutions - has risen by over 150 billion euros since the beginning of April alone, highlighting the increasing reliance on such funding."It becomes more of an issue if the rules regarding what is considered as acceptable collateral were to change," RBS' Peck said."But ELA facilities are emergency facilities, so you would expect by nature of their design that the collateral rules would remain sufficiently soft".

Money markets euribor rates may stabilise around record lows


* Euribor futures suggest rate of 0.64 pct in June, September* Euribor rate falls to lowest since July 2010* Euribor/OIS spreads seen stabilising around 20-30 bpsBy Ana Nicolaci da CostaLONDON, March 22 Bank-to-bank Euribor lending rates fell on Thursday as excess liquidity continued to pressure short-term rates but could eventually stabilise near record lows as the European Central Bank is seen holding interest rates for a while. Three-month Euribor rates fell to 0.817 percent - the lowest since July 2010 - from 0.824 percent on Wednesday. One trillion euros worth of cheap 3-year ECB funding has pulled them back from 1.42 percent where they were before the central bank's first injection in December. Euribor futures show that the 3-month rate should fall to around 0.64 percent in June or September - near record lows of 0.63 percent seen in March of 2010."It seems that June or September Euribor are pricing a level of Euribor which is as low as it can get if the European Central Bank doesn't cut the deposit rate," Corentin Rordorf of Morgan Stanley said.

Since the rate offered at the ECB's deposit facility is currently at 0.25 percent, overnight Eonia rates at 0.35 percent are not expected to ease much further. Given that a three-month borrowing rate has to offer some premium over overnight lending costs, Euribor rates of 0.64 percent, offering roughly a 30 bps premium over the current Eonia rate, cannot fall much further either, Rordorf said. ECB BUFFER

Simon Smith, chief economist at FxPro also saw the 3-month Euribor/OIS spread - a measure of counterparty risk - stabilising around 25-30 basis points, as the ECB is expected to keep borrowing costs on hold for at least the next year. A Reuters poll published last week shows economists expect the ECB to keep interest rates at a record low of 1.0 percent through all of this year and next, after the ECB warned about inflation risks at its last monetary policy meeting."The ECB has been relatively clear, not explicitly saying but giving the impression that it doesn't really have any inclination to move rates lower," Smith added."There's probably a bit further to run in terms of those short-end contracts but not that much further."

The ECB earlier this month raised its forecasts for inflation this year.. Another flare-up in the euro zone debt crisis could cause measures of counterparty risk to widen. Market players are increasingly worried about the fiscal situation in Spain, while they do not rule out further bailouts for Greece and Portugal. Ten-year Spanish/German government bond yield spreads have widened some 40 basis points since the beginning of the week. A widening in the spreads of peripheral debt over their German counterparts could prompt a rise in measures of counterparty risk. But Alessandro Giansanti, senior rate strategist at ING said any impact would be offset by improved funding conditions for banks after the two ECB cash injections, limiting any fall-out. Indeed, excess liquidity in the financial system could take the Euribor/OIS spread as far as 20 basis points, he said."When you know that every bank can access unlimited funding from the ECB, from the national central bank, do you really need (such a big) risk premium in this environment?" he said.

Money markets euribor rates to extend slide; ecb seen on hold


* Euribor rates hit 16-month low; may fall to record* ECB not expected to announce liquidity, rate moves* March Euribor futures contract prices look too low -RBSBy William JamesLONDON, March 5 Euro zone interbank rates should extend their slide towards record low levels thanks to the ECB's boost to banking sector liquidity, but Thursday's central bank meeting is not expected to add to the pace of decline. After pumping 1 trillion euros of three-year loans into banks, the European Central Bank is expected to maintain its 'wait-and-see' stance towards interest rates and future cash injections at its monthly policy meeting. Until recently, many had forecast lower ECB rates to combat a slowdown caused by the euro zone's debt crisis, but those expectations have been slashed according to a Reuters poll of economists. Nevertheless, with banks' funding problems neutralised by the long-term cash and investor appetite for riskier assets increasing, Euribor rates - a gauge of interbank funding costs - look set to drop further towards all-time lows. Three-month Euribor fixed at a fresh 16-month low of 93.4 basis points on Monday. The rate has fallen every day since Dec. 19, declining by nearly 50 bps in that period.

Euribor futures showed the rate was forecast to be 82 bps at the March contract expiry on March 19. However some say the contract's value, which rises when market expect lower rates, could rally further."We like positioning for upside in March (20)12 Euribor futures," RBS strategists said in a research note."There is much more cash in the system versus the aftermath of the first three-year LTRO allotment, so the pace of Euribor decline is likely to remain lofty."

Further along the Euribor curve, rates were seen falling as low as 64 bps by September - a move which would test the record low of 63.4 bps hit in late March 2010."The trend is quite dominant and there's no sign whatsoever that the trend towards lower Euribor fixings is ending any time soon," said Kornelius Purps, strategist at Unicredit in Munich. LOW ECB EXPECTATIONS

However, the ECB was not expected to add momentum to the Euribor slide by cutting rates or announcing fresh plans to boost banking liquidity."There is currently no need or pressure to come up with a cut in key interest rates and I do not expect any announcement in terms of special tenders," Purps said."We have the two (three-year ECB ) tenders out now, and markets have calmed down considerably."Analysts expected the central bank to highlight signs of a stabilising, albeit weak, economic outlook to keep rates at 1 percent. In addition the risk of higher inflation than previously expected had grown due to a spike in oil prices. JPMorgan and Royal Bank of Scotland economists have revised their forecasts to a 'no change' from the ECB on interest rates, having previously forecast a 25 basis point cut."For the money markets there isn't any strong event risk," said Simon Smith, chief economist at FxPro in London.

Money markets euro interbank rates seen reversing falling trend


* Futures contracts pointing to Euribor trend reversal* Greek, Spanish banks worries driving futures sell-off* Buying opportunity for those betting on ECB easingBy Marius ZahariaLONDON, May 14 Future interest rate markets signal the sharp falling trend in benchmark interbank euro rates is nearing an end as the threat of a Greek exit from the currency bloc and worries about Spanish banks outweigh the effect of abundant ECB cash. The June Euribor future was 2.5 ticks lower on the day at 99.30, implying the three-month Euribor rate is expected to settle at 0.70 percent next month, compared with a fixing of 0.689 percent on Monday - a two-year low. The contract has been gradually falling after Greece elected mainly anti-austerity politicians last week, raising the risk that Athens will not stick to its bailout deal, which could lead to another default and potentially force it out of the euro.

Spanish banks' troubles in coping with their bad mortgage loans have also been weighing on Euribor futures contracts. June Euribor traded at 99.40 before the Greek elections, implying expectations that the Euribor rate will fix at 0.6 percent. The fall on Monday marks a turn-around in expectations of where Euribor rates were heading from next month."The whole risk off environment is really leading it ... you see capital stress with the recap (bank recapitalisation) exercise in Spain and the peripherals under pressure again," said Peter Schaffrik, head of European rates strategy at RBC Capital Markets. The three-month Euribor rate, traditionally the main gauge of unsecured interbank lending, has more than halved since late November, when the European Central Bank's two tenders of unlimited three-year loans were first announced.

The massive take-up by banks has brought the excess liquidity in the banking system to a whopping 800 billion euros . But that may not be enough, some analysts say, as the consequences of a potential Greek euro exit were unclear."In time, banks will run out of this liquidity. Bonds need to be redeemed, pre-funding is required," BNP Paribas rate strategist Matteo Regesta said."Possibly the level of excess liquidity, in the absence of further measures, might decrease as we move towards the second half of the year and in the case of a fallout from Greece the ECB might be forced to do more."

A Reuters poll showed 15 out of 25 money market traders did not expect the ECB to conduct any more three-year operations this year. That was a significant change from an April survey, when none of the 26 traders expected the ECB to move again. The possibility of more monetary policy easing from the European Central Bank, although not the central scenario for markets at the moment, inspires those who are buying Euribor futures contracts at the moment. Lena Komileva, managing director and chief economist at G+ Economics, recommends investors to bet against the current trend and buy Euribor futures <0#FEI:> on the longer end of the 2012 strip. The September and December contracts underperformed the rest of the strip, and were both down 5.5 ticks at 99.31 and 99.30 respectively."The sharp sell-off in Euribor Sep12 and Dec12 contracts, combined with higher than expected Euribor fixings since the weekend elections... signal an adverse turn in the euro money markets liquidity cycle," Komileva said."This offers a cheap opportunity to pick up upside potential into the second half of the year as escalating market stresses shape the ECB response towards another rate cut."RBC's Schaffrik, on the other hand, said he had "no convictions" on the Euribor trend at this point and that he would watch future moves from the sidelines.

Money markets european dlr funding costs cheapest in 15 months


A barometer of dollar funding risk reached its best levels in more than a year helped by the prospect of European Central Bank intervention but was seen stabilising from current levels. The ECB's promise to buy bonds of struggling euro zone states, as well as expectations the Federal Reserve may soon embark in a third round of quantitative easing, has improved sentiment towards riskier assets generally, underpinning European stock markets and Italian and Spanish sovereign debt. That backdrop has driven the STOXX Europe 600 banking index to its highest in nearly 6 months, reduced the perceived risk attached to owning debt issued by certain European banks and made it less costly for euro zone banks to access dollar funding. The three-month euro/dollar currency basis swap , which shows the rate charged when swapping euro interest payments on an underlying asset into dollars, was at its tightest since June 2011."That is a proxy of European risk appetite and the narrowing in basis is a reflection of decreased tail risks following the ECB's new support measures " Simon Peck, rate strategist at RBS said.

"Today we have seen three-month euro/dollar cross currency basis move a further two basis points tighter as we have successfully navigated the German constitutional court vote on the legality of the ESM and ... another tail risk."Spanish and Italian bonds rallied and German debt prices fell on Wednesday after Germany's top court gave the green light to the euro zone's new bailout fund, prompting relief the bloc's rescue plans remained on track.. The three-month euro/dollar currency basis swap narrowed to minus 25 basis points from minus 27 bps the day prior, having reached minus 160 bps in November last year when the euro zone debt crisis escalated.

RBS's Peck said there was limited scope for further tightening."The narrow levels at the moment are really (based) on happy outcomes for the likes of Spain and Greece but there remain very sizeable risks that we will not see such good outcomes," Ciaran O'Hagan, strategist at Societe Generale said.

Analysts say intervention will not provide a quick fix and some flag the inherent contradictions in the ECB's strategy. For the central bank to intervene in the market, countries have to ask for a bailout first. But for Spain to seek financial help, it would have to be losing access to financial markets, meaning its borrowing costs would have to be at prohibitive levels, analysts say. Spain's Prime Minister Mariano Rajoy suggested as much when he earlier said his government continues to study the price of seeking assistance but improved market conditions may make aid unnecessary. The one-year euro/dollar currency basis swap was also at its narrowest since July 2011 at minus 29 bps, but one money market trader said he expected it to stabilise at around -25 bps given potential risks ahead."The whole feel-good factor has come back to markets," the trader said. "How long it will last, I am not 100 percent sure."