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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 see new cheap loans from european central bank in

* Despite mixed signals, market expects more cheap ECB loans* Falling inflation, strong euro could force ECB to act* Dwindling liquidity seen pushing near-term rates upBy Emelia Sithole-MatariseLONDON, Oct 24 Euro zone money market investors are betting the European Central Bank will offer banks new long-term loans in 2014 to curb a surging euro and a potential rise in short-term rates that could derail a nascent economic recovery. Business survey data released on Thursday showing activity in the region's services sector unexpectedly slowed in October highlighted the fragility of the recovery in the euro bloc, fostering expectations the ECB will loosen policy further. ECB President Mario Draghi has signalled the bank will ease if needed but recent comments by some of his colleagues have cast doubt on whether this will involve fresh stimulus like the 1 trillion euros in low-cost three-year loans (LTROs) it offered banks in 2010 and 2011. Money markets are pricing in the possibility of a further rate cut or another LTRO with participants leaning more towards the latter as it has proven more effective in bringing down lending rates more broadly than a rate cut. A rate cut would also would not help interbank lending and so still leave weaker banks out in the cold and reliant on ECB largesse. Overnight bank lending rates, as measured by one-month Eonia forward contracts, remain well below the ECB's 0.5 percent refinancing rate until late 2015. The rates would move above the ECB's main rate if the market starts pricing in tighter monetary and liquidity conditions.

A further easing in ECB policy would drive money market rates lower, making the euro less attractive for investors. The single currency is at its strongest against the dollar in two years and threatening to choke export growth."The market is gradually positioning for the potential for the ECB to take another policy measure via a new LTRO during the course of next year," said Patrick Jacq, a strategist at BNP Paribas."This has probably been reinforced by the evolution of the euro/dollar which has strengthened very significantly and could cause some concern as far as the economic recovery is concerned."Draghi said earlier this month the ECB was "attentive" to developments in the euro exchange rate even though it is not among the bank's formal targets.

The euro rose above $1.3800 for the first time since November 2011 on Thursday as the dollar remained under pressure due to expectations the Federal Reserve will delay tapering stimulus until next year. It has risen 4.7 percent against the dollar and 5.3 percent versus sterling so far this year. Companies in the region are already feeling the pinch as the euro's trade-weighted index - reflecting its strength against a raft of other currencies - hit its highest in nearly two years. Anglo-Dutch company Unilever Plc reported slower sales growth after demand for its consumer goods was hit by the devaluation of a handful of emerging market currencies. German business software company Software AG warned with its results on Thursday that its profits could be hit if the euro stayed strong while Italian cable maker Prysmian said the strong euro was not helping.

APPROPRIATE TOOL A sharp fall in inflation could also give the ECB reason to act next year, analysts said. At 1.1 percent in September, inflation has fallen way below the ECB's close-to-2-percent target."Although the ECB doesn't target the exchange rate, this low level of inflation and further strengthening (of the currency) could be an argument for a rate cut," said Anatoli Annenkov, a senior European economist and ECB watcher at Societe Generale."But we still think that an LTRO is the more appropriate tool because on the one hand it could support a weaker currency and lower inflation while providing a liquidity backstop for next year."Money market rates may come under further upward pressure, and the ECB under pressure to act, as excess cash in the euro system is squeezed as banks repay earlier ECB loans. Rates usually start to rise once excess liquidity - the amount of money in the banking system above what it needs to function - drops beneath 200 billion euros. It stands at 187 billion euros, its lowest since late 2011, just before the ECB flooded markets with 1 trillion euros via LTROs."It's just a matter of time in the next few months ... we'll start to have more upside pressure on Eonia. That's something that the ECB doesn't want to see and could be a driver to push the ECB to deliver another round of LTROs," said ING strategist Alessandro Giansanti.