By Jamie McGeever
LONDON (Reuters) - The cost of borrowing overnight funds on international money markets remained close to central banks' targets on Monday thanks to continued liquidity injections but lending was virtually non-existent across all maturities.
More governments across Europe moved over the weekend to assure savers their deposits are safe, which helped swell banks' deposits and on the margins reduced the need to tap central banks for ultra short-term euro funds.
But demand for dollars remained strong. The injection by the European Central Bank and Bank of England of a combined $60 billion of overnight funds into the banking system was oversubscribed, particularly from euro zone financial institutions.
Spreads between bid and offer rates of up to 200 basis points on overnight dollar deposits, for example, reflected just how little lending is being carried out even at these short maturities, traders said.
"Term" funding conditions over periods of one and three months are as poor on Monday as at any time during the crisis, they added, despite the passing of the U.S. $700 billion financial rescue package into law on Friday .
Another bout of carnage in financials in Europe on Monday -- an index of European bank stocks was last down around 7 percent <.SX7P> -- also indicated the extent to which the interbank market remains gummed up.
"There's plenty liquidity in the short dates, but not further out the curve," said a money markets trader in Dublin.
"It's completely frozen. We're not trading. Its only positioning," he said.
Overnight dollar deposit rates were indicated around 1.0-2.5 percent in London, holding close to the Federal Reserve's 2 percent target rate and well down from levels of over 10 percent seen in September after the demise of Lehman Brothers.
The ECB and BoE liquidity provisions helped European banks meet their demand for greenbacks to fund their dollar-based liabilities and market exposure.
Overnight euro deposit rates were indicated in a range of 3.75-4.35 percent, close to the ECB's base rate of 4.25 percent.
ACT TOGETHER
Three-month dollar deposit rates were indicated as high as 5.10 percent. That was higher than Friday's fixing of three-month London interbank offered rates by the British Bankers Association of 4.33375 percent and ICAP's three-month dollar New York Funding Rate of 4.7318 percent.
Rates for three-month euros were indicated in a range between 5.20 and 5.30 percent.
These deposit rates are purely indicative levels, posted by banks on Reuters screens but not necessarily levels at which they are lending or borrowing. In the current climate of extraordinary market tension, they've been especially volatile.
"There are clear signs of top-rated industrial companies no longer having access to credit markets. There is a complete loss of trust in counterparty," strategists at Credit Suisse wrote in a note on Monday.
"We need a systematic not an ad hoc approach in Europe. We need immediately to take at least half a percentage point off rates and to see the yield curve steepen. The crisis is as much European as U.S.," they added.
Last week, the ECB left its benchmark rate on hold at 4.25 percent but highlighted the risk to the European economy from the financial crisis. Financial markets expect it to cut rates by or at its next policy meeting in November.
The market has also moved to price in a 50 basis-point cut in the Federal Reserve's 2 percent funds rate at its policy meeting later this month.
In the course of a hectic weekend, leaders of Europe's four biggest economies -- Germany, France, Britain and Italy -- decided against a coordinated bank bailout, while vowing to stabilize markets.
Germany on Sunday offered a blanket bank deposit guarantee as it clinched a deal to rescue lender Hypo Real Estate
Denmark also guaranteed savers' deposits, Sweden expanded its deposit guarantees, a UK Treasury official said Britain is prepared to take "radical" action if needed to stabilize the financial system, while Iceland's government scrambled to avert a financial meltdown.
In Asia, the Bank of Japan said on Monday it offered to lend 1 trillion yen against pooled collateral in an auction to inject liquidity into the market.
South Korea's finance minister said the government would use the official foreign reserves to help banks which faced difficulties in securing enough foreign-currency liquidity.
(Additional reporting by Kevin Yao in Singapore; editing by Stephen Nisbet)
