Money markets euro rates ease but record cash parked at ecb

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* Liquidity glut pushes interbank rates lower* Banks park record amounts of cash at ECB* Interbank lending largely frozen due to debt crisisBy Emelia Sithole-MatariseLONDON, Jan 6 Interbank rates hit their lowest in nearly nine months on Friday, weighed down by a glut of liquidity in the euro system but interbank lending remains largely frozen as the euro zone debt crisis batters investor confidence. Italian bank UniCredit did little to foster confidence in the European financial sector after it was forced to deeply discount a planned one-for-one equity rights issue, highlighting the problems banks face raising funds. The European Central Bank pumped almost half a trillion euros in three-year loans into the system last month in an effort to ward off a fresh credit crunch, but most of these funds are making their way back to the bank's overnight deposit facility.

Banks parked a record 455 billion euros in overnight deposits at the ECB, data showed on Friday, reflecting their preference for the safety of the central bank to the higher interest rates they could get from lending to each other. They are currently returning to the ECB around two-thirds of a total 685 billion euros it has lent them, including from last month's unprecedented three-year liquidity operation."Risk aversion continues to dominate ... Actual trading is still very much on a name-specific basis," Kevin Pearce, senior broker at ICAP, said."Trading in the week remains thin on both a reluctance to lend and, with banks so long of liquidity, a lack of general bids."

The hunt for safety is also evident in moves at the short end of core euro zone debt curves, with benchmark German Treasury bill yields falling further into negative territory, indicting investors are willing to pay to hold the paper. The injection of cheap funds from the central bank has, however, helped ease some of the tensions in money markets and is keeping interbank offered rates subdued. London interbank offered rates for three-month euros have fallen around 30 basis points since late October to 1.22857 percent, their lowest since last April. Equivalent Euribor rates are also at their lowest since April.

But while the excess is seen keeping key euro priced money markets rates subdued, analysts say dislocations in the interbank markets are likely to remain elevated for as long as the euro zone sovereign debt crisis remains unresolved."Euribor fixings are dropping but there's little turnover behind those rates so it's not an indication to say things are getting better," said Benjamin Schroeder, a strategist at Commerzbank."We've seen an improvement but the underlying problems have not been solved."Analysts hold little hope that a meeting between German and French leaders on Monday will advance the search for a resolution to a crisis now in its third year. Angela Merkel and Nicolas Sarkozy are instead expected to focus largely on strategy for a European Union summit on Jan. 30.