THE EUROPEAN Central Bank has mitigated a major credit crunch by pumping money into banks, according to its president Mario Draghi.
Draghi said that the crunch would have been “much, much more serious” without ECB action last month to flood banks with €489bn in loans.
Traders suspect that the loans contributed to demand at a successful Spanish debt sale yesterday, where Madrid sold twice its target amount of three-year bonds at an average yield of 3.38 per cent.
Italy also saw its yield halve at a bond auction.
Draghi was keen to debunk the idea that money lent out by the Bank has merely been “hoarded” in its deposit facility, suggesting instead that it has moved around the banking system to where it is required – as well as into sovereign bond purchases.
“We really see evident signs that this money doesn’t simply stay in the deposit facility. This money circulates in the economy,” said Draghi.
Reports suggested that record amounts of cash stored at the ECB meant banks have not lent it onward.
But Draghi said: “By and large the banks that have borrowed the money from the ECB are not the same [as those] that are depositing it in the ECB.”
He also said that an impending funding cliff had been a major driver of liquidity demand: “The bidding behaviour in reaction to the [loan auction] depended on the amount of bonds coming due for that specific institution this year.”