ECB pumps record funding to banks to douse debt crisis
The European Central Bank made a record volume of cheap loans available to eurozone banks on Wednesday hoping to turn back the debt crisis, but analysts were sceptical that it was enough.
Analysts said the banks were unlikely to use the cash to buy up sovereign bonds, as governments have been pressing them to do.
And so although the cash might temporarily ease strains in the banking system, it would not provide the long-lasting boost to confidence that markets had been looking for.
In its first-ever 36-month refinancing operation, the ECB lent 489.19 billion ($641 billion) to 523 banks at a rate of just 1.0 percent for an exceptionally long period of three years.
That is the biggest amount ever, beating a previous record of 442 billion euros in a one-year auction in June 2009. It also came in at the top end of analysts' expectations for 100-500 billion euros.
Stock markets and the euro had been higher in the run-up to the auction. But but they fell back into the red afterwards as investors questioned whether the move would get to the root of the crisis and commented that the scale of requests from banks revealed the depth of underlying strains in the banking system.
Analysts at RBS estimated that about 61 percent, or 289.5 billion euros, of the total amount actually represented a roll-over of banks' shorter-term seven-day, three-month and one-year loans into three-year cash and so was effectively a recycling existing liquidity in the system.
That meant the overall net addition to liquidity was much lower at about 191 billion euros.
"The key question now is whether this net new liquidity addition of close to 200 billion euros will be used to purchase sovereign bonds, lend to the economy or pay maturing bonds," RBS said in a note to investors.
"In a deleveraging world, we doubt that this will be used in any meaningful way to buy sovereign bonds ... given the amount of scrutiny under which banks are regarding their sovereign exposures."
In addition, markets would see any earnings boost coming from this operation as a one-off and so the operation was "unlikely to have a long lasting confidence boosting impact," the analysts said.
German banks welcomed the move, saying it had "decisively improved the liquidity situation of the European banking sector."
Along with the other liquidity measures announced by the ECB last week, "these are the right and important steps to counter the danger of a credit crunch in the euro area," said the head of the German BdB banking federation, Michael Kemmer.
In addition to providing unlimited funds to banks on exceptionally easy terms, ECB chief Mario Draghi unveiled last week a relaxation of rules for the collateral required from banks as guarantees for loans and a reduction in the ratio of reserves that banks must hold at ECB, also freeing up capital.
The ECB takes such measures because although it adamantly refuses to act as the lender of last resort to governments, it has always made clear it will do so for banks.
"While the action is very important to help stabilise the situation and reduce the funding risk for the banks, it is unlikely to bring about a turning point in this crisis as the problems are much greater than those in the banking sector and has other political and economic dimensions," RBS explained.
Jonathan Loynes, chief European economist at Capital Economics, said that while the allocation was much bigger than anticipated and 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."
There has been much speculation that governments have been pressing banks to use the ECB cash to buy up large volumes of sovereign debt of the troubled eurozone countries.
Many eurozone governments are having great difficulty in borrowing money on the bond market but need to sell huge amounts of bonds next year to fund their mountains of accumulated debt.
ING economist Martin Van Vliet calculated that the amount the ECB was making available was nearly one and a half times the bond issuance programmes of Spain and Italy in 2012.
But Loynes at Capital Economics pointed out that banks have generally been cutting their exposure to sovereign debt in recent months and would be reluctant to invest the ECB cash in what they continued to view as risky assets.
Christian Schulz, senior economist at Berenberg Bank, was similarly sceptical whether the auction would also help to restore confidence in sovereign borrowers in the eurozone.
© 2011 AFP