Eurozone banks' borrowing from the European Central Bank surged on Tuesday as uncertainty over how leaders would tackle the debt crisis at this week's summit spilled over into money markets, prompting more banks to rely on the region's emergency buffers.
Banks took an additional 43 billion euros of one-week funds at the central bank's regular tender, reflecting the broader tension in financial markets ahead of a crucial summit on how to resolve Greece's debt crisis.
Investors across asset classes were eagerly awaiting Thursday's European summit in expectation of a solution on how private bondholders could be involved in a deal to rescue Greece from its unsustainable debt burden.
"There's a lot of downside for Greek and peripheral markets if officials fail to come to a conclusion, or come to some conclusion which involves considerable private sector involvement," said ICAP analyst Chris Clark. The number of participating banks at the ECB tender rose to 291, from 230 at last week's tender, as inclement market conditions made funding more difficult and the central bank's funding relatively cheaper.
The benchmark Libor fixings of three-month interbank lending rates showed a 26 bps premium above expected interest rates on euro-denominated lending. One-month Eonia dropped by around 6 basis points to 1.266 percent following the release of the tender results, in anticipation of lower rates towards the end of the current maintenance period when banks' need to park money in reserves would be diminished.