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Frankfurt - Banks gobbled up nearly €490bn in three-year cut-price loans from the European Central Bank on Wednesday, easing immediate fears of a credit crunch but leaving unresolved how much will flow to needy eurozone economies.
Following a string of failed attempts by eurozone leaders to thwart market attacks on the bloc's weaker members, hopes of crisis relief before the year-end had been pinned on a massive uptake of the ECB's ultra-long and ultra-cheap loans.
The near half a trillion euro take-up of ECB funds represented the most the bank has ever pumped into the financial system and exceeded almost all forecasts. A total of 523 banks borrowed with demand way above the €310bn expected by traders polled by Reuters,
"The take-up was massive ... much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably," said Annalisa Piazza at Newedge Strategy.
The funding should bolster banks' finances, ease the threat of a credit crunch and may tempt them to buy Italian and Spanish bonds, thereby easing the currency area's sovereign debt crisis.
But analysts said there was little prospect of the cash being hurled at the debt of euro zone weaklings and, while an interbank lending freeze may have been averted, the lack of trust between banks to lend to each other remains unresolved.
Optimism that the lunge for funding would ease Europe's two-year old debt crisis quickly faded, sending the euro and stocks lower after an initial jump.
Banks have struggled to attract funding mainly because of worries about the underlying health of euro zone countries and their exposure to it, so becoming more reliant on the ECB and pledging more assets against those loans may add to the problem.
"It's helpful. It's more than a sticking plaster, although it's by no means the solution longer term," said Chris Wheeler, bank analyst at Mediobanca in London.
Help for Italy and Spain?
The debt problems of Greece, Portugal, Ireland and now Italy and Spain have taken the euro zone's troubles to new heights in recent months and raised serious questions about whether the euro, the currency shared by the 17 euro zone countries, can survive in its current form.
While a lending crunch may have been avoided thanks to the ECB's latest move, it is much less certain that banks will use the money to buy Italian and Spanish government debt, as French President Nicolas Sarkozy has urged, given the competing pressures on them to cut risk, rebuild capital and lend to business.
"While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too," said Jonathan Loynes, Chief European Economist at Capital Economics.
Banks will not increase their exposure to sovereign debt because European Bank Authority (EBA) rules discourage it, Italy's banking association (ABI) said.
"The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB's important liquidity injection ... can be used to support sovereign debt," ABI director general Giovanni Sabatini told reporters.
Given those doubts, most market experts say only more aggressive and direct buying of government bonds by the ECB will help ameliorate the crisis, something it is reluctant to do.
Italy alone faces about 150 billion euros of debt refinancing between April and March and data on Wednesday showed its economy - the euro zone's third largest - shrank in the third quarter, while the ABI forecast a recession next year.
"The crisis is far from over. What I am particularly concerned about is the first quarter of 2012, because of financing needs which are very high," one senior euro zone policymaker told Reuters.
"The fact that the ECB has now made available the 3 year credit lines plus made the collateral more flexible will help banks a lot."
Italian banks tapped the ECB for more than 110 billion euros, an Italian banking source told Reuters while a source from a Spanish bank said nearly all Spanish banks had participated in the 3-year ECB auction and taken up between 50 billion and 100 billion euros.
Funding juggle
One of the key factors certain to have boosted demand is that banks are now more reliant than ever on central bank funds. The ECB said on Monday, in its semi-annual Financial Stability Review, that this dependency could be difficult to cure.
French banks have almost quadrupled their intake of ECB money since June to €150bn while banks in Italy and Spain are each taking more than €100bn.
ECB President Mario Draghi had been pressing banks to take the money since announcing the plans earlier this month. He warned of a chance of a credit crunch on Monday and said that euro zone bond market pressure could rise to unprecedented levels early next year.
The 3-year funds were offered at an interest rate which will be the average of ECB's main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, at a record low of 1.0%.
For some banks the new money could be more than 3 percentage points cheaper than they can get on the open market. As part of the deal, they were able to convert one-year loans they took from the ECB in October into the new three-year loans and also will be able to pay it back after just a year if they so wish.
The ECB was already lending banks €515bn before Wednesday but the new loans will not simply stack on top.
Banks switched €45.7bn out of the one-year loans they took in October. They also scaled down their three-month borrowing from the ECB to €30bn from €140bn and almost halved their intake of one-week loans this week.
Analysts at Royal Bank of Scotland said the actual amount of new money going in to the system as a result of that juggling reduced the headline number to around €200bn.
"The key question now is whether this net new liquidity addition of close to €200bn will be used to purchase sovereign bonds, lend to the economy or pay maturing bonds," said RBS economist Nick Matthews.
Following a string of failed attempts by eurozone leaders to thwart market attacks on the bloc's weaker members, hopes of crisis relief before the year-end had been pinned on a massive uptake of the ECB's ultra-long and ultra-cheap loans.
The near half a trillion euro take-up of ECB funds represented the most the bank has ever pumped into the financial system and exceeded almost all forecasts. A total of 523 banks borrowed with demand way above the €310bn expected by traders polled by Reuters,
"The take-up was massive ... much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably," said Annalisa Piazza at Newedge Strategy.
The funding should bolster banks' finances, ease the threat of a credit crunch and may tempt them to buy Italian and Spanish bonds, thereby easing the currency area's sovereign debt crisis.
But analysts said there was little prospect of the cash being hurled at the debt of euro zone weaklings and, while an interbank lending freeze may have been averted, the lack of trust between banks to lend to each other remains unresolved.
Optimism that the lunge for funding would ease Europe's two-year old debt crisis quickly faded, sending the euro and stocks lower after an initial jump.
Banks have struggled to attract funding mainly because of worries about the underlying health of euro zone countries and their exposure to it, so becoming more reliant on the ECB and pledging more assets against those loans may add to the problem.
"It's helpful. It's more than a sticking plaster, although it's by no means the solution longer term," said Chris Wheeler, bank analyst at Mediobanca in London.
Help for Italy and Spain?
The debt problems of Greece, Portugal, Ireland and now Italy and Spain have taken the euro zone's troubles to new heights in recent months and raised serious questions about whether the euro, the currency shared by the 17 euro zone countries, can survive in its current form.
While a lending crunch may have been avoided thanks to the ECB's latest move, it is much less certain that banks will use the money to buy Italian and Spanish government debt, as French President Nicolas Sarkozy has urged, given the competing pressures on them to cut risk, rebuild capital and lend to business.
"While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too," said Jonathan Loynes, Chief European Economist at Capital Economics.
Banks will not increase their exposure to sovereign debt because European Bank Authority (EBA) rules discourage it, Italy's banking association (ABI) said.
"The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB's important liquidity injection ... can be used to support sovereign debt," ABI director general Giovanni Sabatini told reporters.
Given those doubts, most market experts say only more aggressive and direct buying of government bonds by the ECB will help ameliorate the crisis, something it is reluctant to do.
Italy alone faces about 150 billion euros of debt refinancing between April and March and data on Wednesday showed its economy - the euro zone's third largest - shrank in the third quarter, while the ABI forecast a recession next year.
"The crisis is far from over. What I am particularly concerned about is the first quarter of 2012, because of financing needs which are very high," one senior euro zone policymaker told Reuters.
"The fact that the ECB has now made available the 3 year credit lines plus made the collateral more flexible will help banks a lot."
Italian banks tapped the ECB for more than 110 billion euros, an Italian banking source told Reuters while a source from a Spanish bank said nearly all Spanish banks had participated in the 3-year ECB auction and taken up between 50 billion and 100 billion euros.
Funding juggle
One of the key factors certain to have boosted demand is that banks are now more reliant than ever on central bank funds. The ECB said on Monday, in its semi-annual Financial Stability Review, that this dependency could be difficult to cure.
French banks have almost quadrupled their intake of ECB money since June to €150bn while banks in Italy and Spain are each taking more than €100bn.
ECB President Mario Draghi had been pressing banks to take the money since announcing the plans earlier this month. He warned of a chance of a credit crunch on Monday and said that euro zone bond market pressure could rise to unprecedented levels early next year.
The 3-year funds were offered at an interest rate which will be the average of ECB's main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, at a record low of 1.0%.
For some banks the new money could be more than 3 percentage points cheaper than they can get on the open market. As part of the deal, they were able to convert one-year loans they took from the ECB in October into the new three-year loans and also will be able to pay it back after just a year if they so wish.
The ECB was already lending banks €515bn before Wednesday but the new loans will not simply stack on top.
Banks switched €45.7bn out of the one-year loans they took in October. They also scaled down their three-month borrowing from the ECB to €30bn from €140bn and almost halved their intake of one-week loans this week.
Analysts at Royal Bank of Scotland said the actual amount of new money going in to the system as a result of that juggling reduced the headline number to around €200bn.
"The key question now is whether this net new liquidity addition of close to €200bn will be used to purchase sovereign bonds, lend to the economy or pay maturing bonds," said RBS economist Nick Matthews.
