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Money markets euribor rates sink further after flood of ecb cash

* 3-mth Euribor rates fall to lowest since Sept 2010* ECB overnight deposits hit record high at 827.5 bln euros* ECB interest rates seen remaining at 1 pctBy Ana Nicolaci da CostaLONDON, March 6 Bank-to-bank Euribor lending rates fell to their lowest since September 2010, sinking deeper after the European Central Bank poured in a second round of cheap cash last week to buoy the banking system. Analysts expect Euribor rates to keep falling after the ECB injected another 530 billion euros of cheap funding last week, in addition to the 489 billion euros that banks took up in December. Three-month Euribor rates fell to 0.920 percent from 0.934 percent, sinking to their lowest since late September 2010. One trader said the rate of the decline had accelerated after it broke through the 1 percent level in late February."Once it went through 1 percent, which is the refi rate, it seemed to gain a little bit of momentum to the downside and in doing so it has given a little bit more wind and oomph to the price action in the front end of the Euribor strip futures," said a trader.

"The refi rate at 1 percent looks like it is cast in stone," he said. The huge cash boost for euro zone banks was a factor behind economists' decision to reverse their forecasts for interest rate cuts this year in a Reuters poll published last week. The ECB is now expected to keep rates on hold at 1.0 percent until deep into 2013, the poll showed. As long as the ECB maintains its 150 bps corridor, the difference between the deposit and the marginal lending rate, Eonia forwards indicate the refi rate will remain unchanged at 1 pct until year-end, said Don Smith, economist at ICAP. The three-year cash injection from the ECB has pushed excess liquidity in the money market to a record 813 billion euros according to Reuters calculations, smashing the previous record of 535 billion euros set earlier this year.

Having soaked up the three-year funds, banks are now reducing their intake of short-term money. They took just 17.5 billion euros in the ECB's weekly main refinancing operation - the lowest amount since November 2001. HOARDING CASH There are growing concerns that banks continue reluctant to lend to each other despite the excess cash in the financial system and that the extra liquidity will not filter through into the real economy.

Banks deposited a hefty 827.5 billion euros at the ECB's deposit facility overnight up from 820.8 billion euros the day prior. A Reuters poll of traders predicted that the broader euro zone economy would only get limited benefit from the ECB's funding bonanza because banks were hoarding the money rather than lending it on to businesses and consumers. ECB President Mario Draghi recently urged banks to help strengthen economic growth by lending the money they borrow from the central bank at very low rates to euro zone households and businesses."It's possibly a sign that banks are hoarding cash for a rainy day," the trader said. "I think the market is now addicted to easy cash and I think we are in a very difficult position weaning banks off this life-support machine."

Money markets euro bank to bank lending improves amid scepticism

Oct 31 Surveys by the European Central Bank and others suggest the euro zone's bank-to-bank lending market may be finally starting to thaw, but many in the market remain sceptical. They point, in particular, to continued low trading volumes in overnight lending. The 'unsecured' market, where banks lend to each other without collateral, was the main funding source for many banks before it froze at the start of financial crisis. As sovereign debt worries have taken over, however, many in the struggling parts of the euro zone have been left with very little, if any, access to open markets. They have been almost completely reliant on ECB funding to stay afloat. But now the ECB's pledge to prevent the collapse of the euro by buying potentially unlimited amounts of bonds has spurred the first signs of a thaw in the money market."Banks reported an improvement in their access to retail and wholesale funding across all funding categories. For the fourth quarter of 2012, banks expect funding conditions to keep improving." the ECB's Bank Lending Survey said on Wednesday. The details show the pick up is likely to be small scale. Only a net 10 percent of banks questioned by the ECB see any form of improvement before year-end.

But the figures marry with a report by rating firm Fitch this week that showed U.S. money market funds are beginning to lend to the euro zone again."For the third consecutive month, U.S. prime money market funds increased their exposure to euro zone banks," it said, adding there had been a 16 percent rise in value terms since the end of August. Its analysis also showed the proportion of collateral-backed loans had dropped from 40 percent to under 25 percent over the last three months. With overall exposure rising, it suggests 'unsecured' lending was increasing."This reduction in secured exposure is another potential sign of a more positive investor posture towards banks in the region," Fitch said.

EONIA MOANS But while Fitch's findings point to a small rebound in trust in the bloc, the amount lent by funds to euro zone banks remains 70 percent below the level it was at the middle of last year. Money market traders also remain sceptical about whether there really has been an improvement.

Trading volumes in overnight money markets have averaged at around 25 billion euros over the last couple of months, around a third of the peak volumes seen towards the end of 2007 and roughly half of those at the end of 2010."I have not seen any improvement at all," said one money market trader working for a bank based in the euro zone's healthier northern core."Volume on Eonia is still very low and it is going to stay very low. We just have to wait till there is less stress around Spain and the other periphery countries and that is going to take time."As well as its pledge to keep the euro alive, the ECB's move earlier in the year to stop paying interest on money parked with it overnight has also forced some banks and funds to rethink their previous reluctance to lend to peers. At the same time, high penalty charges imposed on Spanish and Italian sovereign bonds by clearing houses like LCH. Clearnet and CCG has left banks in both countries willing to pay more for funding in the open market. Somewhere in the middle, deals are being done."Some of the UK banks have come in (and started lending to Spanish and Italian banks)," said another money market trader, who like the first requested anonymity."Levels (interest payments) above zero percent are fine for them and they are also doing it to cover their shorts," he added, referring to bets made on the value of a sovereign bond going down.