Europe’s debt crisis has increased the risk of govt and bank defaults, making institutions wary of lending to each other.
The European Central Bank will lend euro-area banks a record amount for three years and more than economists forecast in an effort to keep credit flowing to the economy during the sovereign debt crisis.
The Frankfurt-based ECB awarded euro 489 billion ($645 billion) in 1,134-day loans, the most ever in a single operation and more than economists’ median estimate of euro 293 billion in a Bloomberg News survey. The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark rate — currently 1 per cent — over the period of the loans. They start tomorrow.
“It was obviously an offer the banks could not refuse,” said Laurent Fransolet, head of fixed income strategy at Barclays Capital in London. “It shows the ECB is not out of ammunition and it gives banks security on liquidity for a few years. On the other hand it means banks will rely on the ECB for longer.”
Europe’s debt crisis has increased the risk of government and bank defaults, making institutions wary of lending to each other and driving up the cost of credit. The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds.
New money
Barclays estimates the loans will inject 193 billion of new money into the system, with 296 billion accounted for by maturing loans. The ECB also lent banks $33 billion for 14 days in a regular dollar offering, up from $5.1 billion a week ago, and euro 29.7 billion for 98 days.
The euro jumped half a cent to $1.3198 before slumping to $1.3080 at noon in Frankfurt. Spanish two-year notes extended a decline, snapping an eight-day gain and sending yields seven basis points higher to 3.42 per cent. Italian notes also declined, pushing the yield nine basis points higher to 5.06 per cent.
Italian and Spanish government bond yields have dropped since the ECB announced the loans on December 8 as banks buy the securities to use them as collateral. French President Nicolas Sarkozy has suggested banks could use the loans to buy even more government debt.
“What the ECB wants is that the funds be used by banks to keep handing out loans,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “But there’s a second argument, which is to do carry trades by borrowing on the cheap at the ECB and buying sovereign bonds. We don’t know what the banks are using the money for.”
Refinancing needs
ECB Vice-president Vitor Constancio in a December 19 interview predicted “significant” demand for the loans as banks face “very high refinancing needs early next year.”
Some 230 billion of bank bonds mature in the first quarter of 2012 alone, ECB President Mario Draghi told the European Parliament this week.
“Banks represent about 80 per cent of lending to the euro area. The banking channel is crucial to the supply of credit. Banks will experience very significant funding constraints for the “whole” of 2012”, he added.
Banks from the euro region need to refinance 35 per cent more debt next year than they did this year, according to a Bank of England study. Lenders have more than euro 600 billion of debt maturing in 2012, around three quarters of which is unsecured, the study says.
The ECB is focusing on greasing the banking system to fight the debt crisis as it resists calls to increase its bond purchases to reduce governments’ borrowing costs. Wednesday’s lending exceeded the euro 442 billion awarded in the ECB’s inaugural 12-month loan in 2009. The central bank will offer a second three-year loan in February and borrowers have the option of repaying the funds after a year.
“It’s very significant and very helpful for the banks,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, told Bloomberg Television. “But it’s not going to bring about a turning point in this crisis.”
