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By David Milliken
FRANKFURT, Dec 11 (Reuters) - The European Central Bank lent 60 billion euros ($88 billion) in three-month funds to banks on Tuesday at an average rate of 4.88 percent, the highest since November 2000, in the face of continued credit market tension.
Banks showed strong demand in the auction for funds, with 122 bidding for a total of 105.126 billion euros worth of refinancing. The lowest successful bid, or marginal rate, was 4.81 percent and the highest rate bid was 5.05 percent.
The results were above those foreseen in a Reuters poll on Monday, when traders predicted an average rate of 4.79 percent and a marginal rate of 4.75 percent. At the ECB’s last tender of three-month funds on Nov. 28, the average rate was 4.70 percent and the marginal rate 4.65 percent.
The high rates at the tender reflect fears of a shortage of liquidity at the end of the year combined with pre-existing concerns about banks’ hidden losses from the U.S. subprime mortgage crisis.
Three-month Euribor rates EURIBOR3MD= — an average of the rates offered by major banks and base for many commercial loans — fixed at 4.927 percent just before the ECB tender result, their highest level since December 2000.
Market rates were little changed after the announcement at a bid/ask spread of 4.85/4.95 percent according to Reuters data EUR3MD=.
Rates at an ECB tender of longer-term refinancing were last higher on Nov. 29, 2000, when the average rate was 5.05 percent and the marginal rate was 5.03 percent. But then the ECB’s key interest rate was at its historic peak of 4.75 percent, compared to 4 percent now.
Banks are unwilling to lend to each other because it is unclear how many are still hiding huge losses from the U.S. subprime mortgage crisis. On Monday Swiss bank UBS announced a $10 billion write-down, after taking a $3.7 billion hit in October.
Banks are also seeking extra funds to tide them over the New Year period, when markets are typically thinner but demands for cash higher as customers withdraw money for holiday spending and investments need to be refinanced at the end of the year.
This has pushed up the cost of interbank loans for periods of three weeks and longer.
There is currently an 89 basis point spread between the three-month Euribor rate and the three-month forward rate for overnight lending EONIAINDEX3M=, which factors in expected ECB rate changes but not credit risk and liquidity shortages. Under normal market conditions this spread is near zero.
The 60 billion euros lent by the ECB replaces 75 billion euros of three-month funds which are due for repayment on Wednesday. ECB President Jean-Claude Trichet had announced on Nov. 8 that the ECB planned to roll over two tranches of extra three-month funding granted at the start of the credit squeeze in August and September.
The ECB does not have a target for three-month interbank rates. Its regular monthly tenders of three-month funds are aimed at banks which are too small to find it cost-effective to take part in its auctions of one-week funds, through which the ECB applies its policy rate.
Separately, the ECB drained 21 billion euros in overnight funds from the overnight money market by offering to take deposits at a fixed rate of 4 percent on the last day of its month-long reserve maintenance period for banks.
The ECB often drains funds from the very short end of the market once banks have met monthly minimum reserve requirements, to ensure overnight rates remain close to its 4 percent policy rate.
Overnight rates EUROND= edged higher to a bid/ask spread of 4.01/4.06 percent after the tender compared to 3.96/4.04 percent before it was announced.
In its weekly tender of one-week funds, which also took place on Tuesday, the ECB allotted funds at the highest average rate since Sept. 25.
Some 218.5 billion euros of refinancing — around 35 billion euros more than the ECB estimated would be needed during normal market conditions — was allotted at an average rate of 4.21 percent. The marginal rate was 4.18 percent.
Traders polled by Reuters on Monday had forecast an average rate of 4.19 percent and a marginal rate of 4.17 percent. * FOR DETAILS OF THE 1-DAY TENDER, DOUBLE CLICK ON ECB23 * FOR DETAILS OF THE 7-DAY TENDER, DOUBLE CLICK ON ECB17 * FOR DETAILS OF THE 92-DAY TENDER, DOUBLE CLICK ON ECB25 (Editing by Tony Austin)