Last updated:February 29, 2012 11:10 am
Banks borrow €530bn from ECB scheme
The European Central Bank on Wednesday injected €529.5bn into the eurozone financial system as 800 European banks took advantage of the ECB’s cheap three-year loan programme.
Consensus median forecast had predicted banks would tap about €500bn from the second phase of the ECB’s three-year, longer-term refinancing operation (LTRO), which offers lenders an interest rate of just 1 per cent.
The ECB’s first three-year loan programme in December, which saw 523 banks borrow €489bn, was widely seen as a “game changer” that helped to avert a liquidity squeeze in the European banking system. The LTRO boosted investor sentiment, lifting markets and aiding an initial flurry of bond issues by banks at the start of the year.
Wednesday’s figure included funds rolled from shorter dated operations. About €313.7bn of net new liquidity was added to the system – much more than in December’s loan auction. “This is at the higher end of market expectations and should have a positive impact on risk assets especially when compared to the €193.4bn net liquidity add that was seen from December’s LTRO 1,” said Divyang Shah, global strategist at IFR Markets.
Suki Mann, head of credit strategy at Société Générale in London, said the result was something of a “non-event” and said only a figure at either extreme of consensus forecasts would have had a bigger affect on the markets.
“You can reasonably assume that any major short-term funding issues have now been alleviated and the market can move on,” said Mr Mann. “The fact that more banks participated is a result of the collateral rules being widened.”
The euro weakened compared with the dollar on the news, dropping 0.4 per cent. The FTSE Eurofirst was up 0.4 per cent.
With about €700bn of debt maturing during 2012, a chunk of the funds from both LTRO are likely to be used by lenders to refinance debt.
Banks, particularly those in Spain and Italy, are thought to have already used the first round of cheap money from the ECB to buy their governments’ sovereign bonds, helping to drive borrowing costs lower. Recent figures from the ECB show that Italian and Spanish banks increased their holdings in sovereign bonds by 13 per cent and 29 per cent respectively over a two-month period between December and January.
Since the first three-year emergency funding operation in December, there has also been a noticeable rise in the amount of cash being held at the ECB’s daily facility.
Many expect the second LTRO to be used to refinance debt, buy sovereign bonds and act as a liquidity buffer. However, it remains to be seen how much of that money is filtering down to the real economy in the form of loans to companies.
Some have warned that eurozone banks risk becoming addicted to the cheap funding from the ECB and that it may not be long before the central bank has to commit to a third LTRO.
However, Mario Draghi, the ECB’s president, stressed earlier this month that the measures were temporary and the central bank would not pre-commit to making them a permanent feature of monetary policy.
Copyright The Financial Times Limited 2012
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