MONEY MARKETS-Dlr Libor up on Fed move, caution on Spanish repo

* Dollar Libor rates edge up after Fed discount move

* US/Euro zone rate differentials widen

* First signs of caution over Spanish repo

By Kirsten Donovan

LONDON, Feb 19 (Reuters) - Dollar interbank rates edged up
on Friday after the Fed raised an emergency lending rate, a move
seen as a step towards normalising ultra-loose policy which
stoked expectations policy rates could go up this year.

The increase in the discount rate, the timing of which
surprised markets, hit short-term rates on speculation the U.S.
Federal Reserve was moving faster than expected to wind down its
emergency efforts to fight the financial crisis and recession.

Meanwhile, there were further signs of tightening credit
conditions in the euro zone on concerns over some countries'
fiscal positions, raising expectations the European Central Bank
will find it hard to unwind its extraordinary measures.
The difference in outlook for future interest rates saw the
euro fall to a nine-month low against the dollar and December
Euribor and Eurodollar prices FEIZOEDZ0 converge to their
tightest since May 2009 as the implied yield spread widened.

"While raising the discount rate will not have any tangible
impact on the economy, it does send a very powerful message,"
Societe Generale said in a note.

"The Fed is surprising the market and moving faster than
anticipated, which should move forward expectations on outright
rate hikes."

Implied prospects that the Fed will raise its benchmark
overnight lending target by its September meeting rose to 70
percent, from 54 percent before the Fed's announcement
[ID:nN18611988].

Three-month dollar Libor rates USD3MFSR= were slightly
higher at 0.25194 percent, while equivalent euro rates also
edged up to 0.60625 percent EUR3MFSR= [ID:nEAP000041].

SPANISH REPO

Greek repo remained closed for business this week and
analysts said there were signs of caution in the Spanish market.

"The perceived risk of a Greek government default has been
pushing Greek general collateral prices wider since
mid-November, but it has been the lack of appetite to take on
counterparty risk with the natural holders of that debt -- Greek
domestic banks -- that has, over the past month, effectively
frozen the market altogether," said ICAP strategist Chris Clark.

Central clearing systems remove this counterparty risk for
Italian, Irish and Portuguese repo but for the Spanish, as with
the Greek, trades are settled on a bilateral basis.

"This past week has brought rumblings of Greek-style
developments for Spain's repo market although the price
implications of this remain modest," Clark said.

"Term Spanish general collateral has underperformed slightly
against other peripherals over the period," Clark said.

Tullett Prebon quoted the one-month German general
collateral rate at 0.29/0.27 percent, with the Spanish
equivalent at 0.31/0.35 percent.

The broker's head of G7 market economics, Lena Komileva,
said a tightening in euro zone credit conditions was worrying.

"It is concerning that tighter credit lines are drying up
funding in very short maturities which makes it difficult for
banks to forecast their liquidity needs and manage commercial
activities," she said.

"Market confidence is fragile and credit conditions are
tightening in the most vulnerable areas of the region which have
been hit by deteriorating sovereign credit quality."

The spike in overnight borrowing from the ECB over the last
week also indicated funding strains for some banks.

Analysts said the jump in the marginal lending was likely
due to one bank misjudging its funding requirements and finding
itself still shut-out from the interbank lending market, even at
the shortest overnight maturities.

"The developments from the past week underscore that some
banks seem to even have problems accessing the overnight market
for funding," said Commerzbank strategist Christoph Rieger,
adding that persistent EMU tensions will "bind the ECB's hands
for longer" when it comes to tightening policy.