ECB pumps extra €529bn into financial system

THE EUROPEAN Central Bank has injected an additional €529.5 billion into the euro zone financial system, taking the total supplied to banks under the three-year loan programme beyond €1 trillion.

Some 800 banks took advantage of the second phase of the scheme, with the February take-up edging ahead of demand in the debut December operation when 523 banks borrowed €489 billion.

Broader collateral rules drew in smaller banks, with more than half of the 800 institutions that borrowed money accounted for by German lenders, according to people familiar with the auction.

Italian banks took more than €130 billion, a source said, and their Spanish rivals were expected to have borrowed heavily too.

The ECB’s injection of liquidity into the European banking system has been widely viewed as a “game changer”.

The move has boosted investor sentiment and lifted markets, enabling banks to make a flurry of bond issues at the start of the year.

However, Peter Sands, chief executive of Standard Chartered bank, attacked the glut of central bank money being pumped into the world’s economies, warning this risked “laying the seeds for the next crisis”.

Mr Sands, whose Asia-focused bank is insulated from the euro zone crisis, said no thought was being given to the longer-term consequences of the ECB’s liquidity action.

“It is not clear what the exit strategy is. What happens in three years’ time when [this money] needs to be refinanced?”

Mr Sands is the only prominent bank boss to have adopted such a critical stance, although Josef Ackermann, his opposite number at Deutsche Bank, recently took a swipe at the potential reputational stigma of participating in the scheme.

Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the European Central Bank can limit inflation risks from its lending programme.

“I do think that the ECB will be able to withdraw from the economic circuit those amounts who could be at the origin of a real inflation,” Mr Juncker, who is also Luxembourg’s prime minister, told a European Parliament committee in Brussels.

Analysts had predicted European banks would tap about €500 billion in the second phase of the ECB’s three-year, longer-term refinancing operation – LTRO – which charges banks interest of just 1 per cent.

Analysts said the programme was easing funding strains on banks, but there was little sign it was filtering down to the real economy in the form of easier loan conditions for companies.

Following yesterday’s announcement by the ECB, markets reacted fairly positively, although there was a sharp rise in Portuguese yields, with many investors fearing that it could be the next to need a second bailout. By contrast, Italian 10-year bond yields fell 16 basis points to 5.18 per cent.

The ECB figure included funds rolled over from shorter-dated operations. About €310 billion of net new liquidity was added to the system, much more than in December’s loan auction.

“This is at the higher end of market expectations and should have a positive impact on risk assets,” said Divyang Shah, global strategist at IFR Markets. –  (Copyright Financial Times 2012)