MONEY MARKETS-Money funds soothed by lack of Fed rate-cut talk

* Money funds seen disrupted by any cut in rates on excess
reserves
* Euribor rates hit new record lows after ECB cut

By Chris Reese
NEW YORK, July 11 (Reuters) - Money market fund managers
breathed a sigh of relief on Wednesday after minutes from the
Federal Reserve's June policy meeting showed no indications the
central bank was considering cutting the interest rate it pays
on excess reserves to banks.
Many fund managers believe any cut in the rate, which
currently stands at 0.25 percent, would cause disruptions in
funding markets, especially money market funds.
Minutes from the Fed's June meeting, released on Wednesday,
showed the central bank was open to the possibility of buying
more bonds to stimulate the economy, although the recovery might
need to weaken for a consensus to build.
The minutes did not include any discussion of a possible cut
in interest rates the Fed pays on excess reserves on banks.
Such a cut has been posited as an economic stimulus option
for the central bank, as it would then be less profitable for
banks to leave their excess reserves with the Fed, and might
encourage banks to make more loans and invest in higher-yielding
securities.
But some analysts believe any cut in the interest rate would
hurt money market funds.
"Money funds are prohibited from buying assets with negative
yields. So what would they buy if interest on excess reserves
was lowered and caused all market rates to move to zero percent
or less?" asked Joseph Abate, money market strategist at
Barclays Capital in New York, adding "they would have to close
shop."
Meanwhile, in Europe, euro-zone bank-to-bank lending rates
hit new all-time lows on Wednesday, as the European Central
Bank's move to cut its main refinancing and deposit rates to
historic lows weighed on market rates.
The ECB's overnight deposit rate, which it cut to zero on
Thursday, acts as a floor for money market rates as banks only
lend to rival banks if they are able to earn a better rate of
interest than at the ECB.
The ECB hopes its unprecedented move, which means banks will
now get nothing if they park their spare cash with the central
bank, will boost interbank lending by forcing banks to look for
more profitable options.
Although some money market experts fear the cut could
backfire and kill off parts of the market, the move has had an
immediate impact on bank-to-bank rates.
Three-month Euribor rates, traditionally the
main gauge of bank-to-bank lending, on Wednesday hit a new
all-time low of 0.512 percent, down from 0.521 percent.
Other key rates saw similar drops. Six-month Euribor rates
fell to 0.795 percent from 0.805 percent and
shorter-term one-week rates decreased to 0.145
percent 0.158 percent.
Overnight rates which do not yet factor in the
benefit of the ECB's cut - coming into force overnight Wednesday
- inched down to 0.323 percent from 0.325 percent.
Euribor rates are caught up in a manipulation scandal
centered on the counterpart Libor bank-to-bank rates,
after it emerged a number of banks were falsely submitting the
rates they pay to the committee that aggregates the data.

Dollar-priced three-month bank-to-bank Euribor lending rates
< also fell on Wednesday, dropping to 0.97571 percent
from 0.978 percent, with overnight rates falling to 0.34286
percent from 0.346 percent.
Euribor rates are well above the euro-priced Libor rates,
one reason being that Euribor figures include prices from more
of Europe's struggling banks than Libor.