June 19, 2012 / 1:01 PM / 7 years ago

MONEY MARKETS-Banks' borrowing at ECB rises as Spain stress grows

* Banks increase borrowing at ECB’s seven-day tender

* Rise in demand reflects growing Spanish stress

* Growing ECB rate cut speculation seen weighing on Euribor

By William James

LONDON, June 19 (Reuters) - Bank borrowing from the European Central Bank rose on Tuesday as turmoil in the euro zone government bond markets pushed more banks to take up the ECB’s regular offering of seven-day loans.

Demand for the funds, currently used largely by banks who can no longer borrow money affordably elsewhere, rose by 36 billion euros to 167 billion euros. The number of banks bidding at the auction rose to 101 from 94.

“The rise in the number of bidders points to signs of new stress. I would say Spanish names are behind that,” said Matteo Regesta, strategist at BNP Paribas in London.

Spain has become the focus of the euro zone debt crisis over the last week after a bank rescue plan worth up to 100 billion euros failed to win market confidence and propelled 10-year bond yields above the 7 percent danger level.

Spanish banks have suffered huge losses on souring portfolios of property loans and most have been frozen out of the interbank market where banks borrow money to lend on at a profit. Data released on Monday showed Spanish banks’ bad loans hit their highest since April 1994.

The increase in seven-day borrowing may herald rising market stress but is unlikely to have a major impact on money market rates, which have been pushed to rock-bottom levels by the huge amount of excess liquidity in the system.

Banks’ total borrowing from the ECB is 777 billion euros more than their estimated needs, according to Reuters data , with most locked into long-term loans offered by the ECB in December and February to calm a previous bout of stress.

That excess of liquidity, along with growing speculation that the ECB may cut interest rates to boost the region’s flagging economy, saw the benchmark interbank Euribor rate fall for a third successive session, to 0.657 percent.

The equivalent Libor rate, set by a smaller panel of banks based in London, also fell to a new record low at 0.56557 percent.

The prospect of cuts to the ECB’s deposit and refinancing rates, boosted by recent comments from ECB policymakers, was the main factor driving rates lower, analysts said.

Barclays Capital analysts revised their ECB rate outlook to forecast a 50 basis point cut in the refinancing rate, to 0.5 percent, and a fall in the deposit rate to zero from 0.25 percent.

“In a scenario of the refi rate at 50 (basis points) and the deposit facility at zero, we would expect EONIA to fix at 10-15 bps in the reserve period, with three-month Euribor likely to decline to 40-45 bps,” the bank said in a note.

The Eonia overnight rate fixed at 0.334 percent on Monday.

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