Banks rush to borrow €489bn from ECB

European Central Bank sees massive demand for its three-year loans at low interest rates

Banks gorged on €489bn (£407bn) of liquidity support from the European Central Bank yesterday as the eurozone's lender of last resort sought to avert a new continent-wide credit crunch. More than 500 private lenders rushed to swap eurozone sovereign bonds and other assets at the ECB for three-year loans offered at low interest rates.

European banks have been experiencing an intensifying funding squeeze in recent months as fears have grown over their exposure to potentially toxic eurozone periphery sovereign debt. The Continent's banks have around €720bn worth of their own bonds that they need to roll over next year.

The €489bn borrowed from the Frankfurt-based central bank was considerably in excess of the €250bn to €350bn that had been expected by analysts. The ECB lending programme, first unveiled by the central bank's new president, Mario Draghi, earlier this month, is designed to reduce the likelihood that a large private bank will run out of cash next year and be forced into a catastrophic default.

Yesterday's offer was the largest sum allocated in an ECB liquidity operation since €442bn in one-year loans were snapped up by banks in June 2009. "This is good. It's a positive number, at the top end of expectations. You have to regard it as a positive result," James Nixon at Société Générale said.

Some European politicians, including the French President, Nicolas Sarkozy, have voiced hopes that private banks will use the cheap funds to buy up the sovereign bonds of struggling nations such as Italy and Spain and thus help to stabilise the eurozone debt crisis. Deutsche Bank estimates that banks used about half of the €442bn they borrowed from the ECB in 2009 to buy up Greek and Spanish sovereign bonds.

But analysts were divided over whether this was likely to happen. "Small banks may be tempted to invest the proceeds of the auction into sovereign bonds, profiting from the huge interest rate differentials," Christian Schulz, of Berenberg Bank, said. Annalisa Piazza, of Newedge Strategy, said larger banks are also likely to attempt to benefit from the "carry trade" of buying high-yielding peripheral debt with cheap ECB loans . "Given the large number of banks participating at today's auctions, we cannot rule out some core countries' banks have started to put on some carry positions," she said.

Yet other analysts were sceptical about whether banks would see this as an attractive strategy. "We doubt whether the money will be used extensively to fund purchases of peripheral debt, given concerns about mark-to-market risks and possible reputational risks," Martin Van Vliet of ING said.

And Giovanni Sabatini, of the Italian banking association, said that the recent actions of the European Banking Authority (EBA), which has required banks that hold large sums of peripheral eurozone debt to raise more capital, would act as a disincentive against banks loading up on new European government bonds. "The EBA rules are a deterrent for buying sovereign bonds," Mr Sabatini said. "Not even the ECB's important liquidity injection can be used to support sovereign debt. Banks not only will not increase their exposure, but they will probably cut it."

Ratings agency's threat to US AAA status

The United States was warned that its rising debt threatens its AAA status yesterday, as Hungary became the latest European nation to see its credit rating downgraded.

Fitch Ratings warned again that the United States' rising debt burden was not consistent with maintaining its top AAA credit rating, but said there would likely be no decision on whether to cut the rating before 2013. Last month, Fitch changed its US credit rating outlook to negative from stable.

Meanwhile, Standard & Poor's lowered their long and short-term credit ratings on Hungary one step to BB+ from BBB-, placing the ratings into the non-investment grade, or junk, category.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...