MONEY MARKETS-Access still restricted after Spanish bank bailout
* Spanish bank aid not seen improving their money market access
* Looser ECB collateral rules also seen having limited impact
* Markets expecting ECB to ease monetary policy more
By Marius Zaharia
LONDON, June 22 (Reuters) - The bailout of Spanish banks and any loosening of collateral rules for borrowing from the European Central Bank will do little to improve confidence in bank-to-bank lending markets, which will remain shut for most peripheral banks.
Two independent consultancies have identified a capital hole of up to 62 billion euros for Spanish banks, which have been hammered by a rising number of bad property loans. Spain is expected to submit a formal request for financial help to bail them out in the next few days.
Another measure aimed at helping funding-squeezed Spanish banks that is being discussed is the possibility that the ECB may loosen its collateral rules by allowing the use of more mortgage-backed securities as collateral.
But traders say confidence levels in money markets are so low that those measures will not have a significant or lasting impact. Broader concerns about the fate of the euro zone project are still going to dominate markets after those steps are taken.
"Nothing has happened in the past few years to improve the standard of periphery (banks). Unless there's something pretty dramatic, nothing's going to change any time soon," one trader said.
Traders said only a select group of banks are active in unsecured interbank markets, mainly those based in the so-called "core" of the euro zone, formed of triple-A rated countries, such as Germany, France or the Netherlands.
In Spain, one trader said that the three largest banks Santander, BBVA and CaixaBank, which do not need any fresh funds according to Bank of Spain, are still having access to lending markets, but at an increasingly higher costs.
Others are increasingly reliant on the ECB's regular liquidity offerings for cash.
"We have seen an increase in the cost of borrowing for all Spanish banks. Some of them still have access to the market," said Giuseppe Maraffino, rate strategist at Barclays Capital.
"The market is still very cautious, they want to see more details about the bailout. I don't think in the very near term it could lead to an improvement in confidence. Even after we see the details ... the market will remain cautious because they want to see how the broader situation will evolve."
As tensions in financial markets rise, speculation is growing that the ECB may ease monetary conditions further by cutting interest rates.
Traders estimate the market is attaching a 50 percent chance of a cut in the deposit facility rate from 25 basis points to zero in July and the probability rises further out the curve.
The forward euro overnight Eonia rate for July was last 0.22 percent, compared to Thursday's fixing of 0.33 percent. On average, Eonia rates have recently traded 10 basis points above the deposit facility rate. For dates starting from August to December, Eonia forwards trade around 0.18 percent.
ECB member Benoit Coeure said earlier this week the bank is expected to discuss interest rate cuts at its next meeting.
"Based on the recent comments, it is very likely they will cut the deposit facility to zero," Barclays' Maraffino said.
He warned, however, that this could create distortions in lending markets as those who are now willing to provide liquidity will have little interest in lending cash for even lower rates.
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