ECB pumps new funds into banks
Banks grabbed 530bn euros at the European Central Bank’s second offering of cheap three-year funds, fuelling hopes that more credit will flow to businesses and government borrowing costs will ease further.
A total of 800 banks borrowed money at the tender, with demand exceeding the 500bn euros expected by traders polled by Reuters and well above the 489bn allotted in the first such operation in late December.
“This will increase the level of excess liquidity pretty sharply which is ultimately positive or very positive for risk trades,” said Luca Cazzulani at UniCredit. “Italian and Spanish bonds are likely to benefit from this and equity markets as well.”
The euro rose briefly before easing versus the dollar while stocks were little changed immediately after the slightly better-than-expected take-up.
The three year loans are the ECB’s latest attempt to fight the euro zone crisis.
ECB President Mario Draghi, whose native Italy was at the epicentre of the crisis when the bank announced the measure late last year, said after the first of the operations, known as LTROs, that “a major, major credit crunch” had been averted.
Banks used much of the 489bn euros they borrowed first time around to cover maturing debt. Draghi has urged them to lend out the funds they tap at Wednesday’s operation to households and businesses, helping strengthen economic growth.
ECB officials hope banks will also use the new money to buy higher-yielding bonds more aggressively, especially from Italy.
Anecdotal evidence suggests banks especially in Spain but also in Italy used the first LTRO to make most of this “Sarkozy trade” – a term adopted by markets after the French president suggested governments look to banks flush with ECB cash to buy their bonds.
Spanish banks bought a net 23.1bn euros of government debt last month and Italians 20.6bn, both record increases.
Italy faces a debt issuance hump in the next few months and could do with the second LTRO fuelling demand for its debt. It needs to sell around 45bn euros of its bonds a month in both March and April versus 19bn in February.
Nonetheless, sources have told Reuters that the central bank wants the second ultra-long operation to be the last one, as it is worried banks are becoming too reliant on ECB funds and wants to throw the onus back on euro zone governments to tackle the debt crisis.
Banks have already taken more funds from the ECB than ever before and risk becoming dependent on those. Italian banks had taken more than 200 billion euros in central bank funds by January, and those in Spain and France were not far behind.
The LTROs, or longer-term refinancing operations, have sucked much of the heat out of the euro zone crisis and given governments time to work out sustainable budget and growth policies for affected countries on the periphery of the bloc.
“With the ECB’s supporting measures time is being won,” said Michael Kemmer, managing director of Germany’s BdB banking association. “But these measures can neither replace a functioning interbanking market nor solve the debt crisis.”
Rather than a simple flat rate, the 3-year funds were offered at an interest rate averaging the interest rate in its main one-week refi operations over the next three years. That rate is currently at a record low of 1.0 percent. Banks have the option of paying back all or parts of the loans at any time after one year.