European banks increased their borrowing of three-month funds from the European Central Bank on Wednesday as fallout from Ireland's debt problems tightened lending conditions in money markets for weaker eurozone banks. The higher demand for ECB long-term funds came as investors dumped peripheral eurozone government debt, driving premiums on Portuguese and Spanish bonds over German benchmarks and the cost of insuring their debt against default to record highs.
The price of insuring debt issued by eurozone banks against default as shown by the Markit iTraxx senior financial index of 5-year credit default swap prices rose to a fresh four-month high of 159 basis points. Against this background, banks borrowed 38.2 billion euros in three-month ECB funds, topping the average of 26 billion euro expected in a Reuters poll and extending the maturity of their loans after cutting demand for short-term funds on Tuesday.
The number of banks bidding for the loans jumped to 189 from 139 at the previous tender last month at the tender which gave them a chance to replace 19 billion euros they borrowed from the central bank in August that they have to repay on Thursday.
"The increase in demand and the strong number of bidders is a clear sign of stress," said Matteo Regesta, a rate strategist at BNP Paribas Benchmark euro interbank rates eased as the higher uptake of three-month funds added a net 10 billion euros in liquidity this week to the banking system, bringing the total gross liquidity to around 531 billion euros, according to Regesta.
The three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - eased to 1.030 percent from 1.035 percent. Equivalent London interbank offered rates for euros slipped to fix lower at 0.96875 percent from 0.97375 percent while the liquidity-depended overnight Eonia rate slipped to 0.51 percent and is expected to remain subdued in coming weeks.