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European money lending rates rise

Today saw a further increase in European money lending rates as the ECB announced there will be no extension of the unlimited liquidity operation which has helped support the market for the past few months. In simple terms we have seen around EUR200 billion taken from the marketplace over the last week due to the fact the ECB is not willing to extend what has been a very successful and very much needed liquidity program.

As a consequence, despite the fact that ECB base rates were held at 1% and the Bank of England held UK base rates of 0.5% the cost of lending money in European money markets has increased over the last month by around one basis point. While there is obviously a need for the markets to stand on their own two feet in due course, there is growing concern that the ECB has withdrawn the liquidity program too quickly. While in the short term it had appeared that the withdrawal of the liquidity program had very little impact upon the money markets, in reality the main impact will come when banking institutions look to refinance their borrowings.

The European economy is under severe pressure at the moment and there are concerns that the European Union, and its founder members, is struggling to find extra liquidity to assist.

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