Banks snap up ECB’s €530bn

Banks have grabbed €530bn at the European Central Bank’s second offering of cheap three-year funds, fuelling expectations that credit will flow to businesses and borrowing costs will ease for governments hit by the eurozone crisis.

In the space of two months, the ECB has now injected more than€1tn euro 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 €500bn expected by traders and the €489bn allotted in the first operation in December.

The ECB unveiled the long-term refinancing operations late last year to counter frozen interbank lending and dampen tensions on eurozone 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 €529bn,” 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.

Much will now depend on what banks do with the cash. They used a big chunk of the €489bn they borrowed previously to cover maturing debt and have been parking close to €500bn at the ECB in overnight deposits.

ECB president Mario Draghi, whose native Italy was at the epicentre of the crisis when the bank announced the measure late last year, said after the first of the operations that “a major, major credit crunch” had been averted.

Mr Draghi has urged banks to lend out the funds from yesterday’s operation to households and businesses, helping to strengthen economic growth.

ECB officials hope banks will also use the money to buy higher-yielding bonds more aggressively, especially from Italy.

Italian and Spanish borrowing costs extended their falls after the bumper take-up of ECB largesse.

Anecdotal evidence suggests banks used the first long-term refinancing operations to pursue this “Sarkozy trade”, a term adopted by markets after the French president suggested governments should encourage banks flush with ECB cash to buy their bonds.

Spanish banks bought a net €23.1bn of government debt last month and Italians €20.6bn.

“Italian and Spanish bonds are likely to benefit from this and equity markets as well,” Luca Cazzulani at UniCredit said.