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Money markets euribor rates to extend slide; ecb seen on hold


* Euribor rates hit 16-month low; may fall to record* ECB not expected to announce liquidity, rate moves* March Euribor futures contract prices look too low -RBSBy William JamesLONDON, March 5 Euro zone interbank rates should extend their slide towards record low levels thanks to the ECB's boost to banking sector liquidity, but Thursday's central bank meeting is not expected to add to the pace of decline. After pumping 1 trillion euros of three-year loans into banks, the European Central Bank is expected to maintain its 'wait-and-see' stance towards interest rates and future cash injections at its monthly policy meeting. Until recently, many had forecast lower ECB rates to combat a slowdown caused by the euro zone's debt crisis, but those expectations have been slashed according to a Reuters poll of economists. Nevertheless, with banks' funding problems neutralised by the long-term cash and investor appetite for riskier assets increasing, Euribor rates - a gauge of interbank funding costs - look set to drop further towards all-time lows. Three-month Euribor fixed at a fresh 16-month low of 93.4 basis points on Monday. The rate has fallen every day since Dec. 19, declining by nearly 50 bps in that period.

Euribor futures showed the rate was forecast to be 82 bps at the March contract expiry on March 19. However some say the contract's value, which rises when market expect lower rates, could rally further."We like positioning for upside in March (20)12 Euribor futures," RBS strategists said in a research note."There is much more cash in the system versus the aftermath of the first three-year LTRO allotment, so the pace of Euribor decline is likely to remain lofty."

Further along the Euribor curve, rates were seen falling as low as 64 bps by September - a move which would test the record low of 63.4 bps hit in late March 2010."The trend is quite dominant and there's no sign whatsoever that the trend towards lower Euribor fixings is ending any time soon," said Kornelius Purps, strategist at Unicredit in Munich. LOW ECB EXPECTATIONS

However, the ECB was not expected to add momentum to the Euribor slide by cutting rates or announcing fresh plans to boost banking liquidity."There is currently no need or pressure to come up with a cut in key interest rates and I do not expect any announcement in terms of special tenders," Purps said."We have the two (three-year ECB ) tenders out now, and markets have calmed down considerably."Analysts expected the central bank to highlight signs of a stabilising, albeit weak, economic outlook to keep rates at 1 percent. In addition the risk of higher inflation than previously expected had grown due to a spike in oil prices. JPMorgan and Royal Bank of Scotland economists have revised their forecasts to a 'no change' from the ECB on interest rates, having previously forecast a 25 basis point cut."For the money markets there isn't any strong event risk," said Simon Smith, chief economist at FxPro in London.

Money markets spanish bank cds jumps as contagion risks spread


* CDS on debt from Santander, BBVA jump over past month* Spanish sovereign CDS also rises on fiscal concerns* ECB exit strategy seen a way offBy Ana Nicolaci da CostaLONDON, April 5 The cost of insuring debt issued by Spanish banks against default has risen sharply over the past month, as a tough budget this week did little to soothe concerns over the country's deteriorating fiscal situation. Default insurance for Santander is up 52 percent since March 1 to 393 basis points and the equivalent for BBVA jumped 54 percent over the same period. Both Spanish banks underperformed the Markit iTraxx senior financials index - which measures Europe's financial institutions' insurance, or credit default swap prices. It rose by 20 percent over the same period. Markit analyst Gavan Nolan said s lot of the moved was caused by the European Central Bank's low-interest, three-year loan programmes, or LTROs, that have pumped money into the banking system.

"They've actually tightened the relationship between the banks and the sovereign. So the banks have been buying sovereign debt and that has made their fortunes even more intertwined than they have previously," he said. Pressure on Spanish government debt has had a knock-on effect on banks. Yields on 10-year Spanish bonds this week rose to their highest since December 2011 at 5.8 percent after the Spanish Treasury had to pay more dearly to borrow in an auction. The cost of insuring Spanish sovereign debt against default meanwhile has jumped 111 basis points to 467 bps over the past month, according to Markit data. This means it costs $467,000 annually to buy $10 million of protection against a Spanish default using a five-year CDS contract.

Spain' tough budget this week has not been enough to calm investor nerves and many fear too much austerity could choke an already struggling economy where unemployment rose to a staggering 22.9 percent in the fourth quarter of 2011 - the highest in the European Union. NO EXIT After keeping interest rates steady at 1.0 percent on Wednesday, European Central Bank President Mario Draghi said it was premature for the bank to start planning a retreat from emergency crisis-fighting and that the ECB would need time to see the full impact of bumper funding operations it has used to help banks.

Several policymakers, led by the German Bundesbank chief Jens Weidmann, had said in recent weeks the ECB needs to prepare an exit strategy after the massive cash injection - comments that led to a steepening of the money market curve as markets priced in higher rates in 2013 and 2014. But Alessandro Giansanti, senior rate strategist at ING, said markets had scaled back chances of higher rates in 2014 after the meeting, with 3-month Euribor rates coming further under pressure to hit their lowest since June 2010. The bank-to-bank rate, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 0.766 percent from 0.768 percent in the previous session. Giansanti said the ECB would have to see the inter-bank market functioning again to unwind the measures it took to shore up the banking system."The peripheral banks are still not able to get money in the interbank market so they are relying too much on the ECB," he said. But with domestic banks in struggling peripheral countries increasingly leveraged with their own risky debt, such normalization may still be a way off."I think the pressure is going to continue on Spain and there's going to be more pressure for the ECB to provide further liquidity," Nolan added. "I don't think we are at the stage of an exit strategy yet."