Markets at first responded positively to what some analysts say amounts to quantitative easing, but later, frightened by the voracious appetite of EU banks, sent the euro down against other major currencies, and European stocks fell.
The take-up of unlimited three-year funds from the ECB’s longer-term refinancing operations broke all bank records, being the greatest sum allocated in a single liquidity offer. It was considerably higher than the €300bn some analysts had predicted.
The Department of Finance said it expected the Irish banks would avail of the liquidity. The Government has been pressing the ECB to extend its very short-term money to the Irish banks, which have been almost completely dependent on it, to two or three years and welcomed the ECB announcement that it would make it available for 1,134 days.
“We are sure the Irish banks will be participating. It helps create a certainty being available for a longer length of time,” said a Department spokesperson.
Irish banks had slightly reduced the funds they have from the ECB to €68.6bn at the end of October.
However, whether the banks would now lend to one another again and ease the credit crunch for businesses was unclear. The money could also be used to buy some of the eurozone countries’ sovereign debt and to open lending to the real economy.
The average rate of about 1% is lower than rates of up to 4% some banks are having to pay to borrow on the markets, and should they lend to governments they stand to make good profits.
They may also hold some of the money towards refinancing more than €600bn of maturing debt next year, with about €230bn maturing in the first three months of 2012.
However, the huge demand was read negatively by many investors, who said it indicated the pressure banks are under.
“The take-up rate was higher than expected and it is not good if the banking sector requires that amount of funding — it raises serious questions about the stability of the banking sector,” Reuters quoted Angus Campbell, head of sale, Capital Spreads.
He cast doubt too on the wisdom of banks buying sovereign debt. “The problem is there is a major risk with banks buying the region’s peripheral debt. If the economies in Spain and Italy can’t grow next year, all of a sudden European banks are in a bigger hole than they were before,” he said.
Markets read the take-up as a negative signal for the ending of the euro crisis. Mohamed El-Erian of PIMCO, head of the world’s biggest bond fund, said he believed there was a one-in-three chance that the eurozone would break apart, triggering a crisis akin to that of 2008.
Yesterday’s longer-term refinancing operations put €200bn of liquidity into the system. Banks switched €45.7bn out of one-year loans from the ECB and scaled down their three-month borrowing from €140bn to €30bn, and close to halved their intake of one-week loans this week.
The ECB will hold another three-year longer-term refinancing operation on February 28 and borrowers have the option of repaying the funds after a year.