Money market unimpressed by Draghi's pledges of strong action

LONDON (Reuters) - Euro zone money markets shrugged off the excitement created by ECB President Mario Draghi's comments that he will do whatever it takes to save the euro in a sign that investors believe the ECB does not have much more ammunition left.

Spanish and Italian government bonds rallied, while the euro currency and stock markets across the globe gained on Draghi's pledge on Thursday. Even though the comments came just one week before the ECB's next policy meeting, money markets did not move to price any move on the rates or the liquidity front.

"What does it take to preserve the currency union? If we look at the core of the problem it is not so much related to the level of interest rates in money markets which are extremely low," Rabobank's senior market economist Elwin de Groot said.

"The main (problem) remains the bond market and the trust that money market participants have in the currency union. I think he (Draghi) was just referring to the Security Markets Programme (bond-buying)."

The European Central Bank's bond-buying programme has had only a short-term effect in the past and failed to protect the access to capital markets of countries such as Greece, Ireland or Portugal.

As long as investors continue to fret about the possibility that Spain may have to seek a bailout that would dry up the euro zone's aid resources and leave Italy unprotected against an escalation of the crisis, the interbank market will remain dormant, analysts said.

With no access to markets for themselves, banks would be reluctant to lend to businesses in the real economy, which makes any conventional ECB measure on monetary policy less effective.

Euribor futures were 1 basis point higher on the 2012 strip on Friday, having changed little in the past week, meaning the market's view on where three-month Euribor interbank rates will settle later this year was virtually the same.

Forward euro overnight Eonia rates, which are sensitive to market expectations on the ECB's deposit facility rate, which it cut to zero at this month's meeting, were also stable.

At 0.04-0.05 basis points, Eonia rates dated for the last quarter of 2012 are still discounting a tiny possibility of a cut in the deposit facility to minus 25 basis points - which would effectively penalize banks for keeping their money with the ECB and not lending.

Eonia rates have settled at an average of 8 basis points over the deposit facility in recent months.

"They are still pricing in a small possibility of a move on rates, but those discussions have been going on for some time. The data over the past weeks justify a cut in rates," Commerzbank rate strategist Benjamin Schroeder said.

(Editing by Stephen Nisbet)