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.

News
people
Arts and Entertainment
Armstrong, left, and Bain's writing credits include Peep Show, Fresh Meat, and The Old Guys
TVThe pair have presented their view of 21st-century foibles in shows such as Peep Show and Fresh Meat
Arts and Entertainment
Keys to success: Andrew and Julian Lloyd Webber
arts + entsMrs Bach had too many kids to write the great man's music, says Julian Lloyd Webber
Sport
footballMan City manager would have loved to have signed Argentine
PROMOTED VIDEO
News
people
News
i100
Arts and Entertainment
Hand out press photograph/film still from the movie Mad Max Fury Road (Downloaded from the Warner Bro's media site/Jasin Boland/© 2014 Warner Bros. Entertainment Inc.)
films'You have to try everything and it’s all a process of elimination, but ultimately you find your path'
Arts and Entertainment
Imelda Staunton as Dolores Umbridge in the Harry Potter films
books

New essay by JK Rowling went live on Pottermore site on Friday

News
people

Top Gear presenter is no stranger to foot-in-mouth controversy

News
Russia Today’s new UK channel began broadcasting yesterday. Discussions so far have included why Britons see Russia as ‘the bad guy’
news

New UK station Russia Today gives a very bizarre view of Britain

News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch at the premiere of The Imitation Game at the BFI London Film Festival
filmsKeira Knightley tried to miss The Imitation Game premiere to watch Bake Off
News
i100
Sport
Enner Valencia
footballStriker has enjoyed a rapid rise to fame via winning the title with ‘The Blue Ballet’ in Ecuador
Arts and Entertainment
A top literary agent has compared online giant Amazon to Isis
arts + entsAndrew Wylie has pulled no punches in criticism of Amazon
Arts and Entertainment
Charlie Sheen said he would
tv

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

The benefits of Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Day In a Page

Bryan Adams' heartstopping images of wounded British soldiers to go on show at Somerset House

Bryan Adams' images of wounded soldiers

Taken over the course of four years, Adams' portraits are an astonishing document of the aftermath of war
The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities