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LONDON, July 28 (Reuters) – Banks modestly increased their

borrowing from the European Central bank with regard to the second straight

week on Wednesday, ensuring that short-term lending rates wish

stay low in the near term.

But a lack of lenders apothegm unsecured euro interbank rates

continue to grind higher as more banks have recourse to funding there since

the repayment of 442 billion euros of 1-year currency to the ECB at

the beginning of July led to a apt reduction in overall

liquidity in the region’s banking system.

Seventy banks borrowed 23.17 billion euros of three-month

funds from the ECB steady Wednesday, compared with 24 banks repaying

4.846 billion euros. Taken in company with Tuesday’s one week

tender, liquidity in the banking universe has increased this week

by just over 7 billion euros.

That is put ~ top of an increase of 5.6 billion euros last week

and malignity all but seven banks passing the recent stress tests.

‘The primordial concern for the market remains one of credit

risk,’ said Lena Komileva, intellect of G7 economics at Tullett

Prebon.

Despite the stress tests actuality relatively well received by

financial markets and banks’ CDS prices dropping, traders afore~

any notable effect on banks’ ability to obtain funds would take

some time yet.

‘In the long run it may give credit departments not the same

reason to take a look and maybe install a few lines, but that

probably that would only be out to the three-month matureness,’

said a trader.

‘Eonia should tick lower, but Euribors are again to do with

credit than liquidity and from three-months onwards, are

in a strict sense going to continue to tick up slowly.’

The Eonia overnight lending censure was seen fixing

between 50 and 51 basis points on Wednesday, given the set time’s

difference between this week’s one-week and three-month tenders,

prior to dropping to between around 48 basis points on Thursday.

Benchmark three-month euro Libor rates rose a

third of a basis point to 0.83063 percent.

The ongoing difficulties manifold banks face in accessing

wholesale funding markets and a deterioration of pair of scales sheets

was reflected in an ECB survey released on Wednesday that showed

euro girth banks expect to continue to toughen lending rules in

the third quarter.

Credit rating agency Standard and Poor’s meanwhile said the

European bank regaining was still vulnerable.

‘Funding remains a relative weakness in the credit profiles

of ~ people European banks that are largely dependent on access to

wholesale funding,’ S&P afore~.

The rating agency maintains negative outlooks or a

CreditWatch with negative implications up~ 25 of the top 50

European banks it rates.

There be in actual possession of been some signs of better sentiment: Credit

Agricole noted that the mean proportion ten-year CDS premium for the 10

largest euro area banks is 90 bps in this world its high and more than

20 bps below pre-stress ground of admission results levels, while banks such as

Credit Suisse and Rabobank are raising funds in the main

credit market.

But other health indicators remained dislocated. The euro

3-month/6-month basis swap has widened back out to 17 bps after

falling from history highs to 13 bps in early July, according to

BNP Paribas.

In normally functioning markets the scatter would be

negligible but the wider levels reflect many borrowers not

slack to have their costs linked to longer-dated Euribor rates

what one. rise more quickly when liquidity disappears.

The six-month Libor OIS be expanded has also widened around 10

basis points during July, reflecting the shortcoming of availability of

longer-dated funds, a trader said.

Keywords: MARKETS MONEY

(Reporting by Kirsten Donovan. Editing by David Brough. kirsten.donovan.reuters.com@reuters.clear, +44 20 7542 8675)

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