HONG KONG, June 17 (Reuters) – Dollar borrowing rates inched up on Thursday, nearing highs seen earlier this month, and bellwether U.S. 2-year swap spreads widened as investors remained concerned about funding problems faced by some Spanish banks.

While traders reiterated there were no strains in the Asian dollar funding market, there were still concerns there could be a spillover effect from strains in the euro zone financial system.

Spain’s banking system has largely weathered the global financial storm, but the country’s 45 savings banks have seen their capital base eroded by soaring bad loans due to their excessive exposure to the property and construction sectors, now in steep downturn.

Madrid has repeatedly denied it is seeking a bailout with the latest rumour triggered by the talks between the Spanish prime minister and the International Monetary Fund chief set for Friday. Spain said the talks are unconnected with media reports Madris is seeking Greek-style aid.

In Singapore, three-month dollar funding SIUSD3MD=ABSG costs edged up to 0.54108 percent from 0.54042 percent on Wednesday.

These rates have been meandering in a tight quarter-basis point range in June, wrapped around the 0.54 percent level this month after rates rose 20 bps in May.

Rates struck an 11-month peak of 0.54667 percent last month following renewed concerns about Europe’s debt problems.

U.S. two-year swap spreads USD2YTS=TWEB, which widen during times of financial stress, moved up a quarter basis point to 37.50 bps, still well below a 13-month high of 64 bps struck last month.

“Spanish banks borrowed a record amount from the ECB last month and the CEO of BBVA noted earlier this week that many Spanish banks and corporates are being frozen out of the capital markets,” said a client note from Brown Brothers Harriman & Co.

“The premium that Spain is being forced to pay over Germany for 10-year money is at the widest since the advent of the euro,” the note said, underlining the signs of strain.

But traders said any spillover effect from Europe would be limited given the swap lines offered by the various central banks in a joint arrangement with the U.S. Federal Reserve.

The Federal Reserve has established swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank, and the Bank of Japan.

The swap facilities respond to the re-emergence of strains in short-term funding markets in Europe.

“The previous funding squeeze was because memory of Lehman was still fresh but central banks have come in to provide liquidity and calm to the markets. That seems to have worked for now,” said a Singapore-based trader.

Meanwhile, financial markets are awaiting release of the results of stress tests carried out on all Spanish banks to verify whether they have enough capital to withstand economic downturns. [ID:nLDE65F1AL]

This move is being perceived by some analysts in the market as a positive sign.

“The Bank of Spain is confident that the consolidation of domestic banking sector has made good progress, so confident that it plans to publish banks’ stress tests,” said a report from Goldman Sachs.

In India, the announcement of a central bank bond buyback helped ease tight cash conditions.

The one year overnight indexed swaps rate INRAMONMI1Y= fell basis points to 5.36 percent, pulling further away from an 18-month peak struck earlier in the week.

An expected outflow of over 1.36 trillion rupees between late May and June towards 3G telecom spectrum payments, advance taxes and broadband auction payments has tightened liquidity in the banking system, sending cash rates to the repo rate.

The central bank said the auction would be via multi-security multiple price method and will be funded through the current surplus cash balances of the government. [ID:nSGE65G01T] (Reporting by Umesh Desai; Editing by Kim Coghill)