Money markets us cp outstanding grows for 3rd straight week

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* US seasonally adjusted CP outstanding grows for 3rd week * ECB move on Greek banks a warning to other countries * Worries over health of Spanish banks grow By Chris Reese and Kirsten Donovan NEW YORK/LONDON, May 17 The U.S. seasonally adjusted commercial paper market grew for the third straight week this week, suggesting rising interest in lending to finance inventories and payrolls and to fund short-term corporate debt, Federal Reserve data showed on T hur sday. The size of the U.S. commercial paper market grew by $27.2 billion to $993.6 billion on a seasonally adjusted basis in the week ended May 16 from a seasonally adjusted $966.4 billion outstanding a week earlier. However, the size of the market without seasonal adjustments shrank by $2 billion in the latest week, to $1.027 trillion from $1.029 trillion. U.S. not-seasonally adjusted foreign financial commercial paper outstanding shrank by $1.4 billion in the latest week to $200.9 billion, from $202.2 billion. Three-month dollar-denominated London Interbank Offered Rates (Libor) held steady o n T hursday at 0.46685 percent. Dollar Libor has been holding relatively steady since mid-April, after dipping from the recent high near 0.58 percent at the beginning of the year. Separately, analysts said the European Central Bank's move to stop providing liquidity to some Greek banks is a warning for other countries to take the steps needed to get their banking systems in order. The ECB confirmed on Wednesday that some severely undercapitalised Greek banks could no longer fund themselves at the euro zone central bank and had moved to Emergency Liquidity Assistance (ELA) funded by the national Bank of Greece. "The ECB is now shielding itself much more than was previously the case. They won't destroy their balance sheet for a single country - their actions underpin that," said London-based Commerzbank rate strategist David Schnautz. "The ECB is playing hardball with Greek banks ... we may also see undercapitalised banks in Spain, where you can't take it for granted that the ECB will grant access to all Spanish banks, no matter what." Spain has stepped up efforts to soothe concerns over its banking sector, ordering lenders to set aside 30 billion euros in addition to the 54 billion euros ordered in February to provision against losses on loans that are still performing, as well as against bad ones. But the government's takeover of Bankia has rattled markets. The bank's shares fell 20 percent o n T hursday after a newspaper report - denied by Spain's economy secretary - that its customers had withdrawn more than 1 billion euros from their accounts over the last week. The prospect of yet more state liabilities accruing from the Spanish banking system due to bad loans from a burst property bubble is weighing heavily on Spanish government bond yields. "The ECB is now intent to ... actively put pressure on some institutions, and particularly on political leaders to step up to the plate," said James Nixon, chief European economist at Societe Generale in London. "The bigger game is the ECB feels euro zone leaders haven't done enough to increase the size of the stability mechanism and there's reluctance to use those official channels. The ECB are basically going to force them to do that." The ECB's most recent weekly financial statement showed 11 billion euros of longer-term low-cost funding had been repaid to it before maturity - an unusual move, and only possible if a bank loses its eligibility as a counterparty or falls short of collateral to post against what it has borrowed. Weekly borrowing in the same period also fell by around 12 billion euros, with the corresponding entry accounting for emergency loans rising almost 20 billion euros, suggesting a link to Greek banks losing access to ECB funding. Spain's banks have borrowed over 300 billion euros from the ECB, almost a third of its outstanding financing operations. As the effects of the ECB's injection of nearly one trillion euros of cash into the banking system fade, euro zone three-month bank-to-bank lending rates edged higher on Thu rsday - the first rise seen since the two three-year financing operations kicked off in December.