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European banks 'facing funding squeeze due to sovereign debt crisis'

Banks in Europe are facing a funding squeeze as investors react nervously to the sovereign debt crisis on the continent.

According to a Bloomberg report, there is a lack of willingness to invest in bank securities involving Greek, Spanish and Portuguese bonds held by lenders, while firms are also unsure of loaning each other money.

Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt, said: "There is a lot of mistrust.

"Banks are trading with the European Central Bank [ECB] rather than with each other."

On June 9th last week, lenders deposited a record €369 billion ($451 billion) with the ECB's overnight facility, a higher amount than went in after the collapse of Lehman Brothers in 2008.

Last month, Germany announced a ban on the practice of naked short-selling and speculation on European government bonds held by ten of its banks.

Regulators said the step was necessary because of the "extraordinary volatility" in eurozone bond markets.

By Tony Aynsley