Money markets ecb borrowing rises despite cash glut

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LONDON Jan 17 Euro zone banks stepped up weekly borrowing from the European Central Bank on Tuesday, indicating some banks are still keen to build cash buffers in the face of sovereign debt concerns despite a surfeit of liquidity in the system. Banks' demand for short-term loans was widely expected to fall as the ECB is set to relax on Wednesday the cash buffers it requires banks to place with it and after they loaded up on cheaper longer-term funds from the central bank in December. The ECB move, which will halve the reserves ratio to 1 percent, is one of a swathe of support measures the ECB announced last month and one which it calculates will free up around 100 billion euros for banks. The banks borrowed 126.88 billion euros at the weekly tender, about 16 billion euros more than their take-up last week and above the 100 billion euros forecast by a Reuters poll. They also took up nearly 39 billion euros in 28-day funds, slightly less than the 41 billion euros maturing. This will still boost the liquidity surplus in the market - currently estimated at 424 billion euros according to Reuters calculations - by around 14 billion euros, keeping interbank rates subdued. The ECB's offer of cheaper three-year funds, the second of which is due on Feb. 29 after an injection of nearly half a trillion euros in December, was also having the unintended consequence of keeping banks hooked on the central bank funds."The ECB has made it so much more attractive to borrow from the central bank than from the market so the trend of increased reliance on its funds is not going to go away any time soon," said JP Morgan strategist Seamus Mac Gorain.

"In the February LTRO (long-term refinancing operation) banks will likely pre-fund a significant proportion of their maturing liabilities for the rest of the year on the basis that they have to assume they won't be able to fund in the market."Standard & Poor's downgrade of Italy and Spain's credit ratings to closer to non-investment grade also doused some of the optimism that had been growing in the market as it compounded their banks' ability to tap funding markets.

A survey by Fitch Rating also warned that a possible retreat from southern Europe by covered bond investors may prolong the reliance of the region's banks on central bank support."There may be unease after the S&P downgrade and going into this new regime with lower reserve ratios and so people want to play it safe and are returning to the ECB," said Commerzbank strategist Benjamin Schroeder. Both Libor and Euribor - benchmark rates for unsecured lending between banks - fell to new 9-1/2-month lows on Tuesday, maintaining their downward trek since the ECB's injection of three-year funds in December. The three-month Libor fixing fell to 1.15071 percent from 1.15786 percent while the equivalent Euribor rate fixed at 1.213 percent with both seen edging closer to the ECB's refinancing rate of 1 percent in coming weeks. The overnight rate however bucked the trend, nudging up to 0.386 percent, as it typically tends to at the end of the ECB's reserves period.