Banks gorge on 530 billion euros of ECB funds

Wed Feb 29, 2012 8:00am EST
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By Paul Carrel

FRANKFURT (Reuters) - Banks grabbed 530 billion euros at the European Central Bank's second offering of cheap three-year funds on Wednesday, fuelling expectations that credit will flow to businesses and borrowing costs will ease for governments hit by the euro zone crisis.

In the space of two months, the ECB has now injected more than a trillion euros into the financial system, banishing the threat of a credit crunch.

A total of 800 banks borrowed money at the tender, with demand exceeding the 500 billion euros expected by traders polled by Reuters and the 489 billion allotted in the first such operation in December.

The ECB unveiled the funding operations, known as LTROs, late last year to counter frozen interbank lending and dampen tensions on euro zone bond markets that threatened to tear the bloc apart.

Positive investor reaction to the second round suggested the ploy should continue to buoy markets although central bank sources have told Reuters the ECB is not inclined to offer a third dose.

"You can't argue with 529 billion," said Peter Chatwell at Credit Agricole CIB. "It's undoubtedly positive for risk assets and also will help to support core markets as initially banks need somewhere to store the resultant excess liquidity."

The euro dipped to a session low against the dollar in volatile trade while European stocks gained and safe-haven German Bunds fell in response.

Much will now depend on what banks do with the cash. They used a big chunk of the 489 billion euros they borrowed first time around to cover maturing debt and have been parking close to half a trillion euros at the ECB in overnight deposits.   Continued...

Euro banknotes and a currency graph are placed on mirror and in this picture illustration taken in Zenica, January 22, 2011. REUTERS/Dado Ruvic