FRANKFURT (MNI) – Stronger-than-expected demand for the European
Central Bank’s three-years loans on Wednesday fed hopes of easing
strains in the financial system and averting a credit crunch.

Total demand of E489.19 billion for super-long loans significantly
surpassed the consensus forecast of E250 billion to E300 billion. The
news drove to euro to a one-week high versus the dollar and pushed stock
markets higher.

Today’s allotment exceeds the previous ECB record of E442 billion
in one-year loans in June 2009. The central bank had actively encouraged
banks to participate in the operations, given rising concerns over a
credit crunch in the Eurosystem.

“These measures should ensure that banks continue to have access to
stable funding, also at longer maturities, which gives them the
opportunity to continue lending to firms and households,” ECB President
Mario Draghi said Tuesday in the European Parliament.

There has also been some hope that banks will use cheap central
bank cash to buy much higher-yielding government bonds, helping boost
troubled Eurozone peripheral debt markets. Back in June 2009 a large
number of banks took advantage of this profit opportunity.

“The question now is what will the European banks do with this
liquidity,” said Natixis economist Sylvain Broyer. “Will they simply
keep it in their balance sheets or use this liquidity to buy distressed
assets?”

Capital Economics chief European economist Jonathan Loynes was
hopeful that added liquidity could ease lending strains but remained
sceptical of banks using carry-trade opportunities,

“While this 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, as
banks use the funds to purchase large volumes of peripheral government
bonds.

“After all, banks in the troubled economies have generally been
cutting their exposure to sovereign debt in recent months, even as
shorter-term borrowing from the ECB has risen,” Loynes said.

Martin van Vliet ING noted that while the total volume of today’s
tender exceeded the previous record, the number of banks participating
was notably fewer (523 versus 1,121). This “suggests that the take-up is
currently less widespread – and probably more concentrated in banking
systems in peripheral Eurozone countries.”

“Only banks in peripheral countries with large exposures to local
sovereign debt may decide to actually pursue the sovereign-debt carry
trade. Most other banks, instead, may prefer to use the three-year ECB
loans to finance credit to the private sector or to repay maturing bank
debt,” van Vliet projected.

Draghi had cautioned ahead of today’s operation that banks would
“not necessarily” use funds they do take on for such carry-trades,
though he said that is one possible use for them. Banks decide
independently how to utilize funds, he reminded.

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–Frankfurt bureau. Tel: +49 69 720142: Email: frankfurt@marketnews.com

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