The European Central Bank released a record 530 billion euros on Wednesday, with hundreds of banks borrowing big on the low-interest loans. The cash injection is spurring hopes it will lead to lower borrowing costs across Europe.
REUTERS - Banks grabbed 530 billion euros at the European Central Bank’s second offering of cheap three-year funds on Wednesday, fuelling expectations that credit will flow to businesses and borrowing costs will ease for governments hit by the euro zone crisis.
In the space of two months, the ECB has now injected more than a trillion euros into the financial system, banishing the threat of a credit crunch.
A total of 800 banks borrowed money at the tender, with demand exceeding the 500 billion euros expected by traders polled by Reuters and the 489 billion allotted in the first such operation in December.
The ECB unveiled the funding operations, known as LTROs, late last year to counter frozen interbank lending and dampen tensions on euro zone bond markets that threatened to tear the bloc apart.
Positive investor reaction to the second round suggested the ploy should continue to buoy markets although central bank sources have told Reuters the ECB is not inclined to offer a third dose.
“You can’t argue with 529 billion,” said Peter Chatwell at Credit Agricole CIB. “It’s undoubtedly positive for risk assets and also will help to support core markets as initially banks need somewhere to store the resultant excess liquidity.”
The euro dipped to a session low against the dollar in volatile trade while European stocks gained and safe-haven German Bunds fell in response.
Much will now depend on what banks do with the cash. They used a big chunk of the 489 billion euros they borrowed first time around to cover maturing debt and have been parking close to half a trillion euros at the ECB in overnight deposits.
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 that “a major, major credit crunch” had been averted.
Draghi has urged banks 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.
Italian and Spanish borrowing costs extended their falls after the bumper take-up of ECB largesse.
Anecdotal evidence suggests banks especially in Spain but also in Italy used the first LTRO to pursue this “Sarkozy trade” - a term adopted by markets after the French president suggested governments should encourage banks flush with ECB cash to buy their bonds.
Spanish banks bought a net 23.1 billion euros of government debt last month and Italians 20.6 billion, both record increases.
“Italian and Spanish bonds are likely to benefit from this and equity markets as well,” Luca Cazzulani at UniCredit said of Wednesday’s operation.
Last Round ?
Italy faces a debt issuance hump in the next few months and will take any help it can get. It needs to sell around 45 billion euros of its bonds a month in both March and April versus 19 billion in February.
Nonetheless, sources have told Reuters the central bank wants the second ultra-long operation to be the last, 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.
Some policymakers say the LTROs are merely masking problems in crisis-hit euro zone countries on the bloc’s periphery.
“The idea that the long term repo operations have eased the supply of finance to small businesses in the euro area is a myth,” Bank of England Governor Mervyn King told a parliamentary committee in London.
“What it has done is to provide a source of funding to banks particularly in the southern member countries of the euro area which were experiencing a bank run, enabling them to fund the withdrawal of funds,” he said.
The strategy has, however, 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.”
Ewald Nowotny, a member of ECB’s 23-man Governing Council, said on Tuesday the bank should think about an exit strategy after its massive cash injections.
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.
Financial markets are watching to see how effectively governments use the time the ECB has given them to deliver growth and sustainable budgets.
“Without growth, the LTROs are a bridge to nowhere,” said Andrew Bosomworth, senior portfolio manager at PIMCO.
Date created : 2012-02-29