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
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleThe idea has been greeted enthusiastically by the party's MPs
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
PROMOTED VIDEO
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
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

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game