MONEY MARKETS-Banks’ borrowing shows still reliant on ECB funds

* Banks roll 95 percent of maturing ECB funds this week

* Shows depth of reliance on central bank cash

* Excess liquidity to keep rates pinned down

By Kirsten Donovan

LONDON, Dec 23 (BestGrowthStock) – Euro zone short-term interest
rates were set to remain subdued over the turn of the year as
banks barely reduced their reliance on central bank loans this
week, reflecting the difficulties some face accessing funding.

Euro zone banks borrowed 20.6 billion euros of 13-day funds,
in a specially scheduled operation designed to smooth the expiry
of the European Central Bank’s last 12-month loan made a year
ago [ID:nLDE6BM0QZ]. The relatively modest take-up came a day
after larger-than-expected borrowing at an offer of 3-month
money.

Altogether, just under 95 percent of this week’s maturing
loans have been rolled into new borrowing, much higher than when
two other one-year loans matured in June and September, when RBS
calculates 70-80 percent was renewed.
“It’s not that surprising given the the peripheral banks’
reliance on the ECB is still disproportionately high,” said Nick
Matthews, senior European economist at RBS.

The euro zone’s more indebted countries, mostly on the
currency bloc’s periphery, remain under pressure on concerns
about their creditworthiness ahead of the start of 2011’s
funding programmes.

One trader said these worries were partially behind this
week’s take-up of funds, although some of the borrowing was
likely to be used to cover the year-end period.

Banks in the euro zone have been reluctant to lend to one
another, worried about their exposure to shaky sovereign debt,
leaving the ECB as the only source of cash for some. Irish banks
in particular have increased their borrowing from the ECB
[ID:nLDE68K0ZH].

“It is a reminder – if any was needed – of one of the major
challenges the ECB faces in 2011 and will need to address to
resume its exit from its non-standard measures,” RBS’s Matthews
said.

Offering unlimited, fixed-rate, liquidity to banks
struggling to access funds elsewhere was one of the ECB’s chief
“non-standard” reponses to the financial crisis.

Pressure on the peripheral states has risen in recent days
with rating agencies saying they may downgrade Greece, Spain,
Portugal and Belgium, while Moody’s slashed Ireland’s credit
rating by a whopping five notches.
“With so many countries facing the possibility of (credit
rating) cuts, banks don’t want to take the risk of being caught
with a sovereign downgrade so they will want to get cash in,”
one trader said.

Excess liquidity in the banking system has been reduced by
around 25 billion euros, analysts calculate, still leaving an
ample 75 billion euros or so.

That should keep the Eonia (EONIA=: ) overnight lending rate
pinned to around 60 or 65 basis points at the beginning of the
ECB’s new reserve maintenance period in January, confounding the
central bank’s recent attempt to normalise its liquidity
provision and align the overnight rate with the current 1
percent refinancing rate.

“There are plenty of reasons for the ECB to want to move to
a policy that is mildly, rather than extremely, accommodative
and that is to do with the business and inflation cycles,” said
Morgan Stanley rate strategist Laurence Mutkin.

“But against that, the stresses in the financial markets
give them a reason not to raise rates yet.”

Benchmark three-month euro Libor rates (EUR3MFSR=: ) eased
half a basis point at 0.94125 percent.

Three-month overnight indexed swap rates (EUREON3M=: ) fell
around 7 basis points on Tuesday to 0.56 percent after the
results of the three-month tender were released, widening the
Libor/OIS spread to 35 bps.

MONEY MARKETS-Banks’ borrowing shows still reliant on ECB funds