Eurozone banks living hand to mouth on loose ECB funds

THERE are growing fears that some Eurozone banks could be in severe financial difficulties based on data released by the European Central Bank (ECB) yesterday.

Figures revealed that the Bank’s overnight emergency funding facility is still in high demand despite the ECB having flooded Eurozone lenders with money in recent weeks.

On Monday, banks drew €14.8bn of overnight loans from the ECB’s marginal lending facility, which offers day-to-day funds at the above-market rate of 1.75 per cent.

Thursday’s figures showed that banks needed €17.3bn in overnight support last week, the highest figure since March last year.

Economists said that the sustained demand is particularly unexpected given the €489bn banks took out in three-year loans just two weeks ago.

The data suggests that an unknown number of Eurozone banks have seen their funding situation worsen significantly in the last week so that they were unable to wait for yesterday’s more economical auction of weekly money to supplement the longer-term cash.

“Last week one could have argued that it was for the end of the year [to make balance sheets look good], but you’d have expected it to unwind,” said Henderson’s Simon Ward.

Overall, demand for the ECB’s shorter-term cash has dropped: it conducted an auction of cheaper weekly cash yesterday, in which total demand dropped by €15bn to €130.6bn.

But the overnight figure shows that some banks needed tiding over on Monday before the weekly cash was available.

The ECB is unlikely to tighten the purse strings any time soon. The Bank has appointed a new chief economist to replace Jurgen Stark, who resigned last year in protest at the decision to bail out governments by buying their bonds.

Peter Praet (pictured left), the doveish Belgian member of the ECB’s executive committee, will take over from the hawkish German to head up the economic forecasting on which the Bank bases many decisions.

But despite the ECB’s apparent willingness to act as a backstop for the financial system, Fitch has suggested that it might not be enough.

The rating agency said in a report that some Spanish banks do not have enough collateral of sufficient quality to get ECB funding that would cover the value of their debt that will mature this year.