By Kirsten Donovan LONDON, Sept 26 (Reuters) - Money markets are anticipating crisis-fighting measures from the ECB when it meets next week but while additional liquidity provision or even an interest rate cut could ease funding concerns, they would do little to tackle underlying concerns. Markets are moving closer to pricing in a 50 basis point interest rate cut from the European Central Bank -- which would reverse its tightening moves earlier this year -- and expectations are growing the ECB will offer banks 12-month loans as it did at the height of the financial crisis. Policymakers have indicated that the 1-year tender operations could be reintroduced to help banks with longer-term financing and reduce jitters in the market. "It might buy (the banks) time but it doesn't buy them solvency," said Morgan Stanley's head of European rate strategy Laurence Mutkin. "The first time around the 1-year tender was useful because it was about banks' access to liquidity, but now the question is about what assets are on the banks' balance sheets." Banks have again found that funding markets are drying up -- from short-term money markets to longer-term bond markets -- on fears over exposure to euro zone sovereign debt with no clear solution to the crisis coming from political leaders. "My view would be that there is not a liquidity crisis in European banks," said Russell Silberston, head of global interest rates at Investec Asset Management, who manages about $31 billion globally. "You can buy as much money as you need at the ECB against pretty much rubbish collateral," he said. "Therefore, there is not a liquidity crisis, there is a solvency crisis with European banks." Whereas, it had been the peripheral banks in Greece, Portugal and Ireland that had had funding problems, French banks have been in the firing line recently because of their high exposure to Greece and Italy. Bank of France data shows the country's banks doubled their borrowing at the ECB's longer-term financing operations to around 31 billion euros in the maintenance period ending on Sept. 13, levels not seen since late 2010. "No covered bonds have been issued by European banks in September and repo markets' depth and liquidity are worsening," says JPMorgan strategist Nikolaos Panigirtzoglou. "It thus seems likely that French banks raised their borrowing from the ECB further in the current maintenance period." Measures of stress in funding markets remain at levels not seen since the height of the 2008/2009 financial crisis, and there has not been a single senior bond issue from a euro zone bank for almost three months, the first rolling quarter without an issue since at least 1999. "We believe it is now unlikely that funding markets can be opened for enough euro zone banks, at sufficient scale and at an affordable cost, without some form of policy intervention," UBS strategists said in a note. Another option is for the ECB to reactivate its covered bond programme, which bought 60 billion euros of paper over 12 months from July 2009. Societe Generale calculated that issuance soared to an average of 17 billion euros a month from an average of around 4 billion euros in the months before the programme commenced. But the programme is also about liquidity, rather than capital provision. "It's a case of sticking plasters everywhere, but no surgeon in sight," said SG credit strategist Suki Mann. RATE CUT? ECB policymaker Yves Mersch said on Monday that speculation of a sharp cut in interest rates next month was "wild", but colleague Ewald Nowotny said it could not be ruled out, and markets were increasingly pricing in such a move. Pricing based on forward overnight Eonia swap rates showed expectations of a 25 basis point cut and over halfway to pricing in a further 25 basis points. Banks including JPMorgan and RBS have changed their official call to a 50 basis point cut in October while other analysts see it as an increasing possibility. "(The ECB) need to cut by 50 basis points, not even in October, but today or tomorrow," said BNP Paribas rate strategist Matteo Regesta. "It's not to do with inflation, but the adverse outlook between the financial and real economy, which is building negative momentum day after day." Benchmark three-month Euribor and euro Libor rates have ticked lower on bets the ECB would ease policy, while excess liquidity remains high and Euribor interest rate futures <0#FEI:> have rallied. (Additional reporting by Marius Zaharia; Editing by Susan Fenton)

Source