Banks gorge on ECB loans

Banks gobbled up nearly 490 billion euros in three-year cut-price loans from the European Central Bank on Wednesday, easing immediate fears of a credit crunch but leaving unresolved how much will flow to needy eurozone economies. Following a string of failed attempts by eurozone leaders to thwart market attacks on the bloc's weaker members, hopes of crisis relief before the year-end had been pinned on a massive uptake of the ECB's ultra-long and ultra-cheap loans.
The near half a trillion euro take-up of ECB funds represented the most the bank has ever pumped into the financial system and exceeded almost all forecasts. A total of 523 banks borrowed with demand way above the 310 billion euros expected by traders polled by Reuters,
"The take-up was massive ... much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably," said Annalisa Piazza at Newedge Strategy. The funding should bolster banks' finances, ease the threat of a credit crunch and may tempt them to buy Italian and Spanish bonds, thereby easing the currency area's sovereign debt crisis.
But analysts said there was little prospect of the cash being hurled at the debt of eurozone weaklings and, while an interbank lending freeze may have been averted, the lack of trust between banks to lend to each other remains unresolved. Optimism that the lunge for funding would ease Europe's two-year old debt crisis quickly faded, sending the euro and stocks lower after an initial jump.
Banks have struggled to attract funding mainly because of worries about the underlying health of eurozone countries and their exposure to it, so becoming more reliant on the ECB and pledging more assets against those loans may add to the problem. "It's helpful. It's more than a sticking plaster, although it's by no means the solution longer term," said Chris Wheeler, bank analyst at Mediobanca in London.
HELP FOR ITALY AND SPAIN? The debt problems of Greece, Portugal, Ireland and now Italy and Spain have taken the eurozone's troubles to new heights in recent months and raised serious questions about whether the euro, the currency shared by the 17 eurozone countries, can survive in its current form.
While a lending crunch may have been avoided thanks to the ECB's latest move, it is much less certain that banks will use the money to buy Italian and Spanish government debt, as French President Nicolas Sarkozy has urged, given the competing pressures on them to cut risk, rebuild capital and lend to business.
"While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too," said Jonathan Loynes, Chief European Economist at Capital Economics. Banks will not increase their exposure to sovereign debt because European Bank Authority (EBA) rules discourage it, Italy's banking association (ABI) said.
"The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB's important liquidity injection ... can be used to support sovereign debt," ABI director general Giovanni Sabatini told reporters. Given those doubts, most market experts say only more aggressive and direct buying of government bonds by the ECB will help ameliorate the crisis, something it is reluctant to do.
Italy alone faces about 150 billion euros of debt refinancing between April and March and data on Wednesday showed its economy - the eurozone's third largest - shrank in the third quarter, while the ABI forecast a recession next year. "The crisis is far from over. What I am particularly concerned about is the first quarter of 2012, because of financing needs which are very high," one senior eurozone policymaker told Reuters.
"The fact that the ECB has now made available the 3 year credit lines plus made the collateral more flexible will help banks a lot." Italian banks tapped the ECB for more than 110 billion euros, an Italian banking source told Reuters while a source from a Spanish bank said nearly all Spanish banks had participated in the 3-year ECB auction and taken up between 50 billion and 100 billion euros.
FUNDING JUGGLE One of the key factors certain to have boosted demand is that banks are now more reliant than ever on central bank funds. The ECB said on Monday, in its semi-annual Financial Stability Review, that this dependency could be difficult to cure.
French banks have almost quadrupled their intake of ECB money since June to 150 billion euros, while banks in Italy and Spain are each taking more than 100 billion euros. ECB President Mario Draghi had been pressing banks to take the money since announcing the plans earlier this month. He warned of a chance of a credit crunch on Monday and said that eurozone bond market pressure could rise to unprecedented levels early next year.
The 3-year funds were offered at an interest rate which will be the average of ECB's main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, at a record low of 1.0 percent.