Banks gorge on ECB loans, market cheer short-lived

Wed Dec 21, 2011 12:04pm EST
 
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FRANKFURT (Reuters) - Banks gobbled up nearly 490 billion euros in three-year cut-price loans from the European Central Bank on Wednesday, easing immediate fears of a credit crunch but leaving unresolved how much will flow to needy euro zone economies.

Following a string of failed attempts by euro zone leaders to thwart market attacks on the bloc's weaker members, hopes of crisis relief before the year-end had been pinned on a massive uptake of the ECB's ultra-long and ultra-cheap loans.

The near half a trillion euro take-up of ECB funds represented the most the bank has ever pumped into the financial system and exceeded almost all forecasts. A total of 523 banks borrowed with demand way above the 310 billion euros expected by traders polled by Reuters,

"The take-up was massive ... much higher than the expected 300 billion euros. Liquidity on the banking system has now increased considerably," said Annalisa Piazza at Newedge Strategy.

The funding should bolster banks' finances, ease the threat of a credit crunch and may tempt them to buy Italian and Spanish bonds, thereby easing the currency area's sovereign debt crisis.

But analysts said there was little prospect of the cash being hurled at the debt of euro zone weaklings and, while an interbank lending freeze may have been averted, the lack of trust between banks to lend to each other remains unresolved.

Optimism that the lunge for funding would ease Europe's two-year old debt crisis quickly faded, sending the euro and stocks lower after an initial jump.

Banks have struggled to attract funding mainly because of worries about the underlying health of euro zone countries and their exposure to it, so becoming more reliant on the ECB and pledging more assets against those loans may add to the problem.

"It's helpful. It's more than a sticking plaster, although it's by no means the solution longer term," said Chris Wheeler, bank analyst at Mediobanca in London.   Continued...