Money markets bank reliance on ecb rises; eu summit eyed

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* Bank demand for ECB loans up 4 times on a month ago* Demand seen sturdy for Wednesday's 3-month loansBy Emelia Sithole-Matarise and Marc JonesLONDON/FRANKFURT, June 26 Bank borrowing from the European Central Bank soared on Tuesday, rising more than fourfold since last month in the latest sign that the euro zone's intractable debt crisis is driving up reliance on the ECB's seven-day loans. The rise in demand came as Cyprus became the fifth euro zone state to seek a bailout after Spain - bearing the brunt of the latest debt turmoil - formally applied on Monday to access rescue funds for its struggling banks. Spanish banks faced further pressure after Moody's cut their credit ratings on Monday in a widely expected move after it downgraded the sovereign rating in mid-June. About 180 billion euros was taken up by 105 banks at the ECB's regular offering of seven-day loans on Tuesday, well above expectations and more than four times more than a month ago. The crisis, now in its third year, has choked off bank-to-bank lending.

Only the safest banks in core parts of the bloc are still able to borrow on the open markets, leaving those in Spain, Italy and other countries with outsized debt burdens increasingly reliant on the ECB for their funding. Analysts see little impetus for improved market confidence from a European Union summit later this week, with a quick move towards a banking union or issuance of common euro zone bonds looking increasingly unlikely."In recent months we've moved from dislocated money markets in the euro zone to completely fragmented markets as certain areas have been completely cut off from normal market activity and have become increasingly reliant on the ECB," said Lena Komileva, managing director at G+ Economics.

"The credit downgrades have exacerbated uncertainty about credit risk together with lack of confidence in the ability of EU leaders to find a unified approach of building a banking union."WINDOW DRESSING

This week's demand from banks was higher than the 167 billion euros 101 banks borrowed from the ECB a week ago, well above the 169 billion expected to be taken and far exceeding the 38 billion euros that 84 banks took at the equivalent operation a month ago. Some analysts said the rise could also be due to banks seeking to spruce up their books towards the end of the first half of the year, and were looking to see how much lenders would take up of the ECB's 3-month loans on Wednesday."I would imagine banks would be keen to get some of this longer-term funding on their books," said Simon Smith, chief economist at FxPro. "There maybe some who hold back on the assumption that the ECB may move on rates but... when rates are so low and longer-term ones are done on an average of policy rates over the life of the loan, that effect is marginal."The rising demand for ECB funding is likely to concern the central bank, which has pumped over a trillion euros of 3-year cash into the banking system since the end of December, a move it could have expected to satisfy banks' needs comfortably. It is now lending banks double what it was just six months ago. Reuters calculations show 737 billion euros of excess cash in the euro zone banking system. However, crisis tensions are prompting banks to hoard the money rather than lend it on. Over 750 billion was parked back at the ECB overnight.